Is inflation making a comeback?

Although the price of services has risen over the past few years, cheaper goods manufactured in China have had a deflationary impact on the British economy. But as Chinese wages begin to rise, UK inflation looks set to return.

There have been two inflation rates in Britain over the past few years, says Chris Giles in the FT. The price of services, such as restaurants or haircuts, have been accelerating at an annual rate of around 4%. But manufactured goods ranging from clothes to consumer electronics have been getting cheaper. So thanks to China's deflationary impact on goods cheap Chinese labour has allowed manufacturers to lower prices the overall inflation rate has stayed around the Bank of England's target of 2%.

But perhaps not for much longer, according to central bankers, including Bank of England governor Mervyn King. The Economist cites Jonathan Anderson of UBS, who says China's manufacturers are beginning to hike prices to improve their margins. Labour costs are also on the rise, with wages climbing at 10-15% a year; the minimum wage in Shenzhen, the area near Hong Kong, is set to jump by 20%. Higher commodity prices have also increased costs. Throw in China's inflationary effect on global commodity prices, and "the world's greatest price buster", as The Economist puts it, looks in danger of exporting inflation to the rest of the world. Recent UK data points in this direction: goods prices have been rising, rather than falling, over the past year, and import price inflation recently hit a ten-year high.

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