The Great Leap of Doom for Consumers

“As China’s economy flourishes, the Chinese government keeps increasing the minimum wage rate”

Written by Jennifer Jang, Staff Writer

It’s big news that Canada’s annual inflation rate rose to 3.7% – the highest it’s ever been since eight years ago.

So what are some major causes of this jump? I’ll give you a hint. The price of it is quoted everywhere when you go out, and it’s priced by the litre. You guessed it- gas. I don’t think I need to go into full detail about how outrageously expensive it is to drive now- people complain about it all the time. But we can’t blame everything on gas. Even when we remove the most volatile elements from the calculation of inflation, like petroleum oil and some foods, the core inflation rate is 1.8%; dangerously close to the 2% target that Bank of Canada has set for the nation.

We can’t say we are completely surprised by this. A walk around the mall and a look at the news have told us for some time that things are pricier than before. Cotton and other necessary commodities are really expensive, and cheap Chinese labour is slowly, but surely, coming to an end. As China’s economy flourishes, the Chinese government keeps increasing the minimum wage rate. Finally, China’s labourers are starting to see some light, although the rate is still very low compared to ours.

Many U.S. manufacturers have already reacted to the increase in Chinese wage rates.  They have expanded productions into the more rural part of China, where the wage rate has stayed pretty constant. Also, when the wage rate rises even in the rural areas, American manufacturers plan to move production to other cheap-labour countries, like Vietnam and Laos. But no matter where they might turn to, China remains the biggest labour force in the world. The rise in China’s wage rate will inevitably impact prices in North America and contribute to inflation.

So now that the inflation rate is alarmingly high, people are asking, “Will the Bank of Canada raise interest rates?” If you don’t know why everyone’s asking this question, all you need to understand is that the interest rate is the cost of borrowing money. People borrow money to buy things. If it’s expensive to borrow money (aka. interest rates are high), then people buy less. And when people buy less, inflation calms down a little.

The most common solution to fighting inflation is raising the interest rates. This sounds all easy and dandy in theory, but the plan could backfire on our run-down economy. If people start spending even less than they are right now, what hope is there for recovery? If we keep interest rates low, we don’t know what will happen to inflation, but if we raise interest rates, the economy will come to a halt. Let’s hope that the Big Bank turns this lose-lose situation into a winning one for all of us here in Canada.

ARB Team

Arbitrage Magazine
Business News with BITE.

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