In Our Dollar, Your Problem, author raised this question – why China didn’t see a faster inflation it should see. The higher inflation rationale is that when tradable goods sector productivity rises fast, this part of the economy will attract more workers, presumably from non-tradable goods sector. Thus, wage should rise and likely at a faster pace than the productivity gain in non-tradable goods sector, which should result in higher inflation in non-tradable goods sector to counter labor inflation.
In the books, the author mentioned one plausible explanation, which was Chinese gov could move massive population from rural areas to cities and factories. The amount of inflow was so large that wage increases were not seen. Thus, there is lower than expected service inflation.
This sounds reasonable.
I have additional arguments on #why China didn’t see strong inflation in non-tradable goods sector.
1/ The high-end of services are not priced fairly in China.
Unlike more capitalism-driven societies, the high-end supply and demand are exchanged in non-monetary channels. E.g. think about the high-end healthcare senior gov officials may receive in China – that’s not charged at the “market price”. Thus, you can’t measure the inflation, if that doesn’t carry a “price”.
In additional, the high-end services may not be available to the public or openly marketed. Thus demand is lower than it should be.
2/ High-end demand is shifted abroad.
Chinese wealthy like to shop, travel and live abroad.
This lowers the inflation across the board.