China Inflation Grows, And Profits Will Shrink

Inflation blossomed in China last month. Most of the cause was food prices. That may change as the country’s workforce agitates for higher wages.

“The consumer price index rose 3.5% from a year earlier on a jump in food prices, accelerating from July’s 3.3% increase for the biggest gain since October 2008,” according to Dow Jones.  The data was part of a broader announcement of China’s economic activity in August. Production moved up 13.9% from August 2009 and retail sales rocketed 18.4% higher. There is nothing wrong with the People’s Republic’s manufacturing sector. That could change if another recession in the West and Japan takes hold.

The central government on the mainland does have to be concerned that recent labor strikes driven by a desire for higher wages among the nation’s burgeoning middle class of factory workers may spread widely. The compensation for the rapidly growing sector of the population does cause improvement in retail sales, as the August number shows. But, labor costs could surpass those of food as the largest component a swift rise in inflation.

If the manufacturing sector does face a rise in expenses for worker compensation, its margins could be compressed significantly. China faces greater and greater pressure to allow the yuan to float which would also change the dynamics of gross margins at many Chines companies.

Profits in China’s factory sector are about to shrink

Douglas A. McIntyre