I raised this risk quite some time ago: Australia starts importing inflation from our major trading partners. In the last couple of months, I have started reading about it for the first time--wage price pressure in China generating cost push inflation in Australia. This is the rarely discussed downside of Chindia's much mooted urbanization/industrialization. Rising living standards come about because of higher incomes and thus wages. The worrying thing for Australia is that the AUD/USD pair is likely to start depreciating, and possibly significantly, over the next 1-2 years as a function if 1/ rising US interest rates, 2/ tapering commodity prices, and 3/ an inflation-induced slowdown in many Asian countries, including China and India. This means that the currency itself could become a source of domestically imported inflation at the same time as the capex-boom is starting to cause its own inflation problems. Bill Evans of Westpac touched on the genesis of this thesis in his latest note following a trip to Asia:
"A separate source of inflation is coming from wages policy in China. One customer complained about a 20% increase in the minimum wage in his region. He neglected to add that minimum wage hikes across the provinces averaged 26% per annum from 2004 to 2008, and it is not clear what proportion of migrant workers earn the minimum. But margin squeeze looks like a reality, and producers will have to try to claw back some cost escalation from their customers."
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