Opinion | Coming era of stagflation and wealth destruction will be boon to working class

While investors tremble at the prospect of falling asset prices and tighter monetary policy, the working class is set to benefit from rising wages

Strong wage growth could drive higher consumption and prop up the global economy while overvalued stocks and real estate fall sharply

Reading Time:4 minutes

Published: 9:30pm, 26 Jan 2022

The world is entering a period of stagflation, with inflation significantly above the economic growth rate. The world’s major central banks are unlikely to halt the trend by raising interest rates aggressively. Instead, they will remain behind the curve and tighten monetary policy slowly to avoid a recession.

The US dollar-renminbi peg is an anchor for currency stability, reducing the urgency to fight inflation. Tighter monetary policy will be sufficient to trigger asset deflation, though, reversing the trends of the past two decades and causing a downturn in global capital expenditure.

Labour shortages will lead to rising wages, which can support consumption. The combination means we will see slower growth than in the past 20 years, with growth likely to be halved.

Money and inflation are reconnecting after decades of easy monetary policy failing to lead to significant inflation. China joining the World Trade Organization was the disruption that disconnected the two. With vastly more available labour, new infrastructure and wages far below those of developed economies, global capital poured into China to take advantage of the gap.

Now the average yearly wage in China is around 30 per cent of the average for members of the Organisation for Economic Cooperation and Development, and China is also facing a shrinking labour force. Opportunities for arbitrage in China are nowhere near what they once were as any production that could have relocated to China has done so.

Employees work on a car seat assembly line at Yanfeng Adient factory in Shanghai on February 24 last year. China’s entry into the WTO two decades ago opened the door to global capital drawn to the country’s pool of low-cost labour. Photo: Reuters

The China story has become firms trying to take a bigger slice of the current pie rather than upgrading their existing production in China. This fundamental shift is reconnecting inflation to money supply.

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