Last week, China reported that over the past year, consumer prices had risen 5.1 percent. While prices have been creeping up in China for months now, the report grabbed international attention, and for good reason. As the world's factory and its second-largest economy, China's inflation rate has serious consequences for the global economy and domestic stability.
To some extent, inflation in China is a delayed result of the $586 billion stimulus package Beijing announced in 2008. Following the initial onset of the global financial crisis, the People's Bank of China (PBC) embraced a period of loose monetary policy as a way to keep its economic engine running. Hailed as a success at the time -- and as a favor to the global economy -- the flood of money into the economy has led to increased domestic asset prices.
Another major part of China's inflation problem is the price of food, which increased more than 11 percent in the past year. While some of this increase has to do with changes in international food prices, much of China's problem is a function of increased agricultural wages. As has been pointed out elsewhere, the pull of higher wages in urban areas has left China with a depleted rural workforce. In some areas, this has led to a doubling of wages for farm laborers. Rising food costs indicate that these increased labor costs are being passed on to the Chinese consumer.