Apr 09 2008

Enter the age of inflation…

Rising inflation in Asia stings in the West – International Herald Tribune

I hate bad news. But this is bad news. Just as the US economy is about to officially enter its long-dreaded recession triggered by falling home prices and weak investment and consumption, it looks like inflation will continue to accelerate as wages and commodity prices skyrocket across Asia.

“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.
It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to their customers.

Now Americans are in big trouble. While the dollar plummets, making imports more expensive, wages and input prices in Asia are climbing, leading to autonomous increases in the price levels overseas.

That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.

So where lies the hope for relief? Is there any? What are the possibilities that input costs will fall in Asia, offering relief to consumers in the West? Daniel Altman, the International Herald Tribune’s economics blogger, has this to say:

On the labor question, there is some precedent for relief. When wages rose in Japan and Korea, production of cheap consumer goods and electronics shifted to Hong Kong and Malaysia. When wages there rose, it moved to China and Vietnam. With higher wages in those countries, it could shift to poorer nations in Africa, Central Asia and Latin America – provided those nations are stable enough to do business with foreigners.

There is no relief in sight for energy and commodity prices, however. Demand is simply too great. New technology could provide some answers with time, though it’s not clear how it can solve problems like the lead and copper shortages. In the short term, we may simply have to accept that living standards, judged by our material consumption, will not rise as quickly as they have in the past couple of decades. It was a nice ride while it lasted, eh?

Globalization and free trade have led to huge improvements in access to affordable manufactured goods for Western consumers. The hope that cheap imports will drive our consumptive lifestyles into the future, however, is waning as the basic economic problem of scarcity rears its ugly head in labor and commodity markets.

Discussion Questions:

  1. Is global inflation today primarily demand-pull or cost-push? How do you know?
  2. What implications do rising wages in China have for less developed countries such as those in Africa and Latin America?
  3. As commodity supplies dwindle, how can the world’s economies continue to grow? Can they? Will the world ever reach a point where continued growth is impossible and a period of contraction begins?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

24 responses so far

24 Responses to “Enter the age of inflation…”

  1. jacqueszhangon 09 Apr 2008 at 6:39 pm

    Global inflation in seems to stem from both demand-pull and cost-push inflation. In most cases, demand grows faster than supply does, which is indeed why we always see inflation, not deflation. Cost-push inflation is also accountable for the inflation because of rising energy prices, such as diminishing oil resources.

    High wages mean greater input cost, as labor is an input to production. Because of this, many developing countries that rely on imports from developing countries like China also face higher costs because developed countries have increased their prices.

    The only solution seen in the remote horizon is the use of renewable energy resources. In essence, all energy is renewable, but resources like oil tend to take billions upon billions of years to renew. Thus, the use of crops as an energy source to make energy like biofuels or the such is quite a good solution. The problem is that it's costly, and despite the black environment we're creating and the diminishing resources, many LEDCs have no means of using such expensive resources.

  2. Angel Liuon 09 Apr 2008 at 7:38 pm

    Despite the negative impact inflation brings, less developed countries in Africa and Latin America are given a chance to bloom. It is true that many of these countries depend on imports from developed countries and these imports are getting more expensive. However, the amount of imports they buy is relatively less compare to US's dependency on Chinese manufactured goods because they don't have a wealthy economy to consume so much. Currently, LDCs are developing and discovering new resources; remember in the beginning of school year there was an article on a weed growing in Africa that produces more biofuel than corn? LDCs contain abundant resources so under today's economic condition, LDCs can finally depend on its own resources, whether sell them abroad or use it domestically, to improve their economies. And as the article stated, many companies are turning to Africa and Latin America for cheap labor.

    Today's inflation is part of a global business cycle. We're at a transition state where businesses have absorbed the available resources in Asia and are now struggling to find a new foothold. Commodity supplies might dwindle for a while, but our innovation will create new and more efficient commodities.

  3. Jessica Ngon 09 Apr 2008 at 7:38 pm

    I think that global inflation is caused mostly by cost-push inflation due to the increasing energy prices, in particular oil. Although there are cases of demand-pull inflation, the magnitude of cost-push inflation is much bigger, thus we see many cases of stagflation. This isn't so desirable because stagflation is much more difficult to combat.

    Rising wages in China means that the input costs in production in China has increased, in turn the prices of products will increase, thus a higher burden on consumers and also the U.S. economy, especially with its already weak dollar. As the article suggests, rising wages in China might signify an increase in foreign investment in lesser developed countries like Africa and Latin America. Whether their economies and political situations are stable enough to facilitate foreign trade is a different story. But in the long run, it's looking pretty good for these less developed countries, as it finally has a chance for some serious economic growth.

    This cycle of transfering production to countries with cheaper labor will come to an end eventually, when we have run out of countries to produce cheaper goods. But I don't think that necessarily means that there will be a period of contraction. Growth might be much slower, but new development in technology, and increases in productivity and effeciency will never stop, and thus there is virtually no limit in growth. We might run out of resources, but at the same time, we can be smarter in the ways we use our existing resources.

  4. emilyyehon 09 Apr 2008 at 9:20 pm

    1. Well I really do think its both. The newfound wealth of many people – especially in Asia, and Russia (home to the most billionaires I think?) as well as accelerating investment certainly affects the demand side of the curve, as people demand more products, and more resources are needed to cover the necessities. On the other hand, the growing scarcity of fossil fuels is forcing the conversion of other products to renewable energy, which pushes up prices even further. Its the combination of a supply shock and ever-accelerating demand for products that has so many nations in a difficult situation right now.

    2. Rising wages in China makes it less attractive for investors. Firms looking to build new factories may now turn to regions such as Africa and Latin America to take advantage of the comparably cheaper labor in those locations.

    3. I don't like this doomsday belief that economic growth will slow, but I mean, logically it makes sense. The world's population has got to stop growing at some point as land is limited. Nature appears to have its own way of setting things right. Lack of land means lack of food, which often equates to famine, and people die out. I mean, look at the Black Death. Previously, Europe suffered from overpopulation and laborers were abused. Afterwards, they were increasingly able to negotiate for higher wages and the balance in populations was sought. So unless Mars is actually habitable, I doubt economic growth can continue forever.

  5. Christina Huon 09 Apr 2008 at 10:49 pm

    1.Both, because obviously with the large, rapidly growing population and rising standards of living, demand is surging. Also, because consumption is rising, resources are becoming more and more scarce, and, in effect, more expensive.

    3. The world will undoubtedly reach a point where continued growth is impossible, unless scientists find a way to turn trash into food and energy. The earth does not have an infinite number of resources.

  6. Chan Min Parkon 10 Apr 2008 at 1:29 am

    1. Primarily it is both demand pull inflation and cost push inflation. There is too much demand and therefore price levels rise. Then, as price level rises, wages rise and costs of production also rise. This causes price level to rise even more.

    2. Less developed countries are given a chance to develop and people will probably look to invest in these countries and employ a lot of workers in those countries.

    3. I think as these supplies run out there may probably be new inventions and there will be other supplies used in making goods. However eventually, I think resources will not be allocated efficiently and there will be periods of contractions. After periods of contractions there then may be some economic growth, there can be an alternation between the two.

  7. KatherineYangon 10 Apr 2008 at 12:54 pm

    Inflation is due to both cost-push and demand-pull, however, I believe cost-push carries more weight. The culprit of cost-push inflation are increasing energy prices, particularly oil. Demand-pull comes from the rapidly increasing population demanding more and more goods and services.

    The rising wages in China mean other less developed countries starting to look more attractive to investors.

    There will always be a point where further growth is impossible. As countries run out of resources, periods of contractions will have to occur, especially as the world's population continues to increase as dramatically as it does.

  8. Sharon Lion 10 Apr 2008 at 5:53 pm

    Inflation is caused by both demand-pull and cost-push inflation today- Demand-pull because of our pretty consumerist world and cost-push because resources cost more from scarcity, and also maybe we demand more than the that which our resources can provide. Lately, energy costs (oil) have skyrocketed, and so have food prices.

  9. richardtuon 10 Apr 2008 at 8:16 pm

    1. Global inflation is mainly caused by cost-push inflation, because for example, oil and rice, these are resources. And as we know, energy/resource prices is a determinant of supply curve. Currently, the oil prices and food prices has sky rocketed, causing what we called the "supply shock", thus, causing the supply curve to shift to the left. (cost-push inflation)

    2. Well, as the wages rise in the less developed regions like Africa. Since many workers have high willingness to work at a good price, many rational firms would build their new factories and plan their capital investment over in those regions. Thus, improving the less developed regions.

    3. Well, i think there will ALWAYS be a point where economic growth stops and experience periods of contraction. However, after the periods of contraction, we will definitely see a blooming economy once again. So i think, it's like a circulation.

  10. howard linon 10 Apr 2008 at 8:55 pm

    Rising Wages in China implies that the few less developed countries would soon be crowded with companies that wants to build factories since the price for labor is rising rapidly. Considering the fact that wage is an input cost for producers.

  11. Charlie.Gaoon 10 Apr 2008 at 9:23 pm

    On the contrary to everyone's comments except for Ng and some others, I'd say that inflation is mostly caused by a shift in AS. That's why it's so hard to fix the inflation nowadays. If it were caused by AD, monetary and fiscal policy could be imposed to fix it.

  12. judychenon 10 Apr 2008 at 9:43 pm

    I think global inflation today primarily is cost-push inflation. As we know, oil is used almost in every production now. Plus, the oil for cars as well. Therefore, prices have gone up really high, so there's inflation.

    Rising wages in China gives firms less incentives to have a factory in China, since firms tend to maximize profits. So firms would start seeking places with cheap labor just like what China used to be. So less developed countries such as Africa and Latin America definitely need more development to improve their living standard. Therefore, even firms only pay a low wage, people in those poor countries would still be willing to work for them.

    I think as we are reaching a point of global inflation, people would not just let it keep happening, so I think there is still a chance for increase in improductivity or maybe finding more undiscovered resources.

  13. Nicole Wongon 10 Apr 2008 at 10:43 pm

    Global inflation today is mostly cost-push. This is seen when the wages issues in Hong Kong and Malaysia. As resource costs increase, aggregate supply decreases and price level increases, meaning inflation. Once workers realize their real wages have decreased, they demand higher wages.

    As wages begin rising in China, this predicts a rise in wages in other less developed countries as well, who may begin to follow China's example.

    Economies cannot continue to grow forever. At some point, resources could either run out or their prices could skyrocket. The business cycle shows that every expansion has an inevitable recession as an economy that grows extensively is very liable to rapid inflation, which could be the downfall for the economy.

  14. andyxuon 12 Apr 2008 at 1:58 pm

    Of course, the current rapid increase in price level is a result of both demand-pull and cost-push direction, mostly the latter. In graphical terms, the AS curve is shifting leftwards due to higher per-unit production costs brought by the increased price of energy. The AD curve is shifting rightwards due a greater demand of an expanding population in China.

    What should China do? Shift the AS curve outwards, that is, increase the quality and quantity of human and natural resources through better education, training and health care of the growing workforce and improving the utilization rates of raw materials.

  15. Jo Loon 12 Apr 2008 at 4:44 pm

    Global inflation today is primarily due to cost-push. Prices worldwide are increasing, and the most profound being the skyrocketing of the price of oil. It is now much over $100 a barrel and economists predict it will go even higher.

    The rise in prices and wages in China will probably shift production to countries in Africa and Latin America. There are doubts that these countries do not have the necessary means to reach out to foreigners and do business, but China was probably in the same position before the wave of businesses went into the country. If China was able to do it, the African and Latin American countries should be able also, albeit not to the degree in China.

    I think countries will be able to continue to grow. New technologies are always giving us 'more' resources (making less resources needed to do something). But the biggest area where countries will be able to get profits is the environmental sector. More and more people today are realizing the effects of climate change and will thus demand more environmentally friendly solutions. New jobs will arise and replace those currently in the oil businesses.

  16. kevinhuangon 12 Apr 2008 at 5:21 pm

    1. I think that the inflation is primarily caused by demand-pull inflation because of the transition of many 3rd world countries into the world of economics. Jess Ng talks about many cases of stagflation but i think there are more cases of inflation accompanied by an increase in real GDP, which would include countries like China, Vietnam, Cambodia, and many other developing countries that are facing inflation as foreign investment inundates them; therefore, this would a be a case where demand has shifted to the right and as a result there are higher prices and increased GDP.

    2. Foreign investment will turn towards those less developed countries and as a result they will enjoy the benefits of economic growth.

    3. Perhaps, but there is still hope as many countries are developing more efficient ways of harvesting resources and energy while also finding ways to continuously renew resources and energy.

  17. kevinmaon 12 Apr 2008 at 9:52 pm

    I agree with the people that think inflation today is cost-push. Because resource prices are rising, it causes the AS to shift in which creates less output and price level decreases.

    Because wages in China are rising, it is more costly to produce their goods in China. So as the cost per unit begins to rise, the business will start to make less money which will make them want to move to another country where they pay the workers less money to produce their product. Even though they want to do so, not all poor/developing countries are able to keep maintenance of the factories. some of the underdeveloped countries may not have the things they need to run a factory.

    I think anything can happen. There will always be something new. However, i think there will always be a new peak followed by contraction. Like someone said earlier, the business cycle shows that economies will sometime have to go into recession.

  18. Cassy Changon 13 Apr 2008 at 10:18 am

    1. I think it's cost push since production costs (including natural resources and wages for labors) increase, shifting the supply curve leftward.

    2. Other developing countries will have a chance to improve unemployment rates.

    3. techonological advances will keep economy growing.

  19. Alex Goldmanon 13 Apr 2008 at 1:32 pm

    1. Cost-push inflation seems a reasonable answer, since our resources are being rapidly exhausted causing an increase in production costs. This increases inflation, and as a result workers demand higher wages. An of this example might be China, where prices of many everyday household (oil and pork come to mind) have been increasing at a frightening rate.

    2. Less developed countries might experience a great deal of foreign investment. A less developed country which has cheap labor, resources, and products invite foreign importing. As a result of the net export effect, the AD for these countries shifts out and decreases unemployment.

    3. The issue of resource exhaustion can be solved primarily by the development of new technology. For example, using solar and wind power can replace fossil fuels as energy. To avoid a period of stagnation or contraction, resources need to be allocated more efficiently and recycled. The finite supply of resources will eventually be used up.

  20. serenatuon 13 Apr 2008 at 4:42 pm

    1. I agree with everyone else that the inflation is a cost-push inflation. The supply curve shifts inward due to the price increases in resources. Thus less production will cause the price of the product to go up.

    2. As the labor wages are increasing, and prices for some other resources are increasing also, many of the manufacturing company will start to find other place to locate their factories, such as Vietnam, as they have cheap labors, and lower costs for production. As more foreign investments start to settle in less developed countries, their AD curve will shift to the right, and reduces the unemployment rate.

    3. I agree with some people that we will definitely run out of resources some day, but I also agree with people saying that with the new technologies, we will discover new resources, so as a result, the economy will keep growing.

  21. Hansenon 13 Apr 2008 at 5:37 pm

    The increase in labor wages is an increase in input cost. As a recent NYTimes article said, the free ride that the US economy has had on China's cheap labor is coming to an end shortly. The implications with this are that Latin America and Africa get a new comparative advantage. Their labor is still cheap compared to the rising prices of China.

    As for running out of resources, between the push for renewable resources and new technologies which allows us to do more with less, I feel the economy may slow during the transition period between old and new, but will keep growing.

  22. Michael Dailyon 13 Apr 2008 at 7:34 pm

    1. Cost-push inflation seems to be the primary inflation today because of both dwindling resources and increases in the costs of production. Inflation, which can occur because of these increases in the costs of production, ends up initiating increases in the price level. In the AD-AS model demand for goods and services is increasing shifting the AD curve right but the increases in the cost of production drives the AS curve left. The result is higher prices. This is evident in China with pork because the increase in production costs has caused the massive resulting inflation in pork prices.

    2. Rising wages in China may cause less developed countries to receive a greater deal of focus as they would offer cheaper labor and resources. This would help the economies of the less developed nations by decreasing their unemployment, while at the same time help their own economy by reducing production costs.

    3. Scarcity of resources is of course a concern for world economies, and new technology is the best solution. Obviously, new technology does not just rise out of thin air and takes time to develop, but since resources are dwindling it is our best chance to prolong resources if we are able to use them more efficiently. Resources although seemingly infinite are limited. Therefore, to avoid a period of no growth and contraction we need to learn to allocate resources more efficiently and effectively, such as learning to find alternate ways to produce energy than the use of fossil fuels.

  23. Howard Jingon 14 Apr 2008 at 1:23 am

    1. I think that cost-push inflation is the primary source of inflation in developed countries because of rising oil prices. However, in developing nations such as China, I think that the primary soruce of inflation is demand-pull inflation due to a rising standard of living for some sections of the population.

    2. Rising wages in China means that manual labor becomes relatively cheaper in lesser developed nations such as Latin America and Africa. Foreign investors would naturally become drawn to these cheaper sources of production, and the economy will start to increase in these countries.

    3. I don't think that we are in danger of running out of critical resources in the near future (after all, Dakota has a ridiculous amount of shale oil, and Canada has a bunch of tar sand). Although resource scarcity and global warming are definitely issues that need to be dealt with, I think that we have enough resources to be able to develop new technologies to help tide us over. I think that we can eventually depend on entirely on renewable resources, and we can always try colonizing other planets if something really catastrophic occurs.

  24. Jennifer Choion 14 Apr 2008 at 7:34 am

    I also think that it is the cost-push inflation is the main cause of inflation through out the world, mostly becuase of rising input costs including rising oil prices and labor costs (wages).

    Rising wages in China means that input costs and thus the product price in general is rising in China. If that's true, the burden of inflation will be on consumers and on other countries that are trying to utilize China's cheap labor. If China's output price continues to grow other nations would have to find another nations that provides with relatively cheaper cost of production, just like as it is stated in the article when Japan and Korea could no longer find 'cheap' labor in HK and Malaysia they moved to China and Vietnam.

    I, too, don't think we are in danger of running out of 'cheap' labor, which is our critical resource, becuase i think it is all the matter of relative expensiveness. Even if China or Vietnam's wages for laborers continue to increase, it would be still cheaper to produce in these nations than in the US, where the labor costs are much higher. So I think we will still utilize relatively cheaper resources.