Inflation is not supposed to be a problem. If it is not under house arrest it is at least taken to be wearing an ankle bracelet. But there is growing evidence that it is on the loose.

As to why it is supposed to be under control, the usual explanation is that the entry of Asia into the world economy has reduced labour costs. Since labour is such a big part of both manufactured goods and services, it is reasonable to think that lower wages will lead to lower prices.

As to why inflation may now be at large, we offer the following: the Asians have to eat too.

Wages in mainland China are said to be going up by nearly 20% per year. In other words, the cheap labour is not as cheap as it once was…and getting more expensive each year. And now that these wage earners are coming up in the world, they want a little more meat in their soup.

Money, as we all know, practically grows on trees. But food does not. (Readers can try to fix that metaphor on their own time). And putting more Asians to work does not automatically increase the supply of farmland…or what grows on top of it…or what lies underneath of it. So, what we’ve been seeing is just what you’d expect. While increased industrial output has managed to hold prices down for manufactured goods, the rising supply of money has forced up prices for things that don’t come out of factories. Gold, contemporary art, land, and cooking oil come to mind.

Cooking oil comes to mind because it was in the news this week:

“…this past Saturday in Chongqing,” reports the New York Times , “people began lining up before dawn when a Carrefour store offered a discount on large jugs of cooking oil, an essential for a lot of Chinese cooking. When the doors opened, a stampede ensued, killing 3 people and injuring 31. China’s commerce ministry responded on Monday by ordering a ban on limited-time sales promotions.”

Officially, prices are rising at a 6.5% annual rate in China. Even at the official rate, the Chinese have not seen so much inflation in nearly 11 years. But food is rising faster…at a 17.6% rate. This is a big problem in China –people don’t earn much money, so they have to spend a lot of it on food. That’s why people got killed trying to get a good deal on cooking oil.

We recall what Jacques Diouf, director general of the UN’s Food and Agriculture Organisation, had predicted only weeks ago: “If prices continue to rise, I would not be surprised if we began to see food riots.”

Well, there you are, Mr. Diouf. You were right.

Regards

Bill Bonner
For The Daily Reckoning

Bill Bonner [send him mail] is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning. He is the author, with Addison Wiggin, of New York Times Business best sellers "Financial Reckoning Day: Surviving the Soft Depression of The 21st Century" and "Empire of Debt: The Rise Of An Epic Financial Crisis", and with Lila Rajiva, "Mobs, Messiahs, and Markets". Copyright © 2007 Bill Bonner