China, like much of emerging Asia, is grappling with an inflation problem. That problem is rising food costs which are disproportionately hitting the lower to middle income Chinese consumer.
And while this rise in costs is due to several reasons, notably increasing demand and a lack of arable land, its also about a rise in wages. A rise China is now pushing for.
From Societe Generale:
Therefore the authorities have vowed to boost the income growth of low-to-middle-income population so as to soothe the pain caused by inflation. However counter-intuitive it may seem, this approach makes a lot of sense for China where income disparity has been rising for years and inflation could be a potential trigger of large-scale social unrest. For the moment, raising minimum wages and providing more social benefits merely allows poor people to catch up with the inflation of basic consumption.
While the result of this may temporarily be good news, as lower income Chinese citizens are able to buy more food, it could lead to what Societe Generale call a “wage inflation spiral.” In such a scenario, wages may keep increasing, but the market will expect it, and prices will keep rising too.
A look at how wages and prices in China are linked, from Societe Generale:
[credit provider=”Societe Generale”]