This month I want to address a common question being asked by investors - how long could high and higher prices last? The short answer is potentially a very long time.
Over the past 30 years, the world economic system has experienced an unprecedented positive shock to the supply of global labour. The effective labour supply for the world's advanced economy trading system more than doubled over the 27 years from 1991 to 2018. The future is unlikely to be the same!
So why did the labour pool double and what impact did it have? First, the rise of China meant it more than doubled the labour supply for the production of tradable products among advanced economies. Supply and demand economics suggest that when supply doubles, price is the adjusting factor: that is, prices of products out of China have continued to fall.
Further adding to the labour pool were people moving from its rural areas to its urban economic powerhouses. The impact of excess supply of cheap labour from China can also be read in the US's labour participation rate, which declined by 4% over the past 30 years.
So, China has been a deflationary force for a long time and attempts by central banks of advanced economies to push up inflation through very low-interest rates failed to inflate the imported prices from China. But China's labour supply is set to shrink, a reflection of its ageing population.
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