According to a model simulation, the Dutch inflation rate turns out to be fairly sensitive to this price development. While the developed economies have been recovering from the financial crisis at a moderate speed, many emerging economies have again been growing apace, amid high credit growth, rising real estate prices and low unemployment. Currently, the annual inflation rate in emerging economies (including developing countries) is already running at 6%, far outstripping the 2% prevailing in developed economies. Further acceleration of the inflation rate constitutes a major risk for the emerging economies.
The situation in China provides a good example of that risk. In response to rising inflation and low unemployment, Chinese employees have successfully demanded higher salaries. Many regions in China have raised the minimum wage by 10%–20% this year alone. The resulting rise in production costs has increased the pressure on the already low profit margins on low-tech manufactured products. To avoid running up losses, producers face the need to on-charge the rising costs to their customers, threatening to trigger a wage-price spiral. Producers in China will not only raise their prices for Chinese consumers, but their export prices as well. The strong growth of domestic demand in China has made producers less dependent on exports, enabling them to raise export prices without risking a steep drop in total sales.
Many countries have for years 'imported' low inflation through imports from low-wage countries such as China. From 1995 until 2009, Chinese export prices hardly rose at all (see the Chart), whereas at the same time, the share of China in global trade rose from 3 to 9 per cent. The slow rise of Chinese export prices is not a matter of course, however. Between 1983 and 1994, for instance, annual price rises above 20% were no exception. Even now, after a price drop in 2009, an upward trend is emerging that according to current analysis will last until 2013. The difference compared to the 1980s and early 1990s is that China now is the largest exporter in the world. Therefore the expected price rises are to carry over into the global economy and thus herald an end to imported low inflation for the developed economies. The effect will be the stronger because China is no exception. Many other Asian and South American economies also combine high economic growth with low unemployment and rising inflation.