Inflation has quite suddenly, come to dominate debate on economic policy in many of the main capitalist states. In the past few months, it has risen sharply, in Britain to more than seven percent, in the US to over eight percent.
This has been a shock, partly because, since the global financial crisis of 2007-9, the problem has been much more deflation—falling prices—than inflation, rising prices. Slow economic growth has been associated with an inflation rate that struggled to rise above zero.
To counter deflation, central banks cut interest rates to the bone. They also adopted the policy of quantitative easing (QE)—so creating money and using it to buy bonds from banks to encourage them to lend to investors. Hard-line neoliberals denounced this.
According to the orthodox quantity theory of money, prices will rise if the money supply is increased. Critics of QE predicted inflation would take off. But it didn’t. Instead, the rich used the cheap money provided by the central banks to buy more shares and real estate and become even wealthier than they already were.
So what has changed? There were several major shifts in the productive economy, caused mainly by the pandemic. The balance of demand for goods and services shifted. For example, instead of going out to restaurants and pubs, affluent households bought food and drink to consume at home. Higher demand for goods coincided with various problems in supplying them. Perhaps the best known example is the shortage of computer chips.
Then, among other things, the prices of second-hand cars shot up to compensate for the scarcity of new ones. Workers used being put on furlough to try and switch to better-paid and more pleasant jobs. You don’t have to share Adam Smith’s faith in the market to see that a lot of this kind of disruption will be overcome as supply and demand adjust.
But two longer term trends have complicated the picture. First, as economies seek to reduce their dependence on the worst fossil fuels, such as coal, demand for gas has risen. In particular, East Asian economies such as China and South Korea have started importing more gas. Meanwhile, the Opec+ cartel dominated by Russia and Saudi Arabia and the US shale oil-and-gas industry cashed in by refusing to raise their output.
So energy prices were already soaring last winter before Russia invaded Ukraine. The war reflects the second long-term trend towards greater inter-imperialist rivalries. The confrontation between the US and its allies and Russia has pushed energy prices up further, while the producers still refuse to increase output and push inflation. This has led to the harsh cost of living squeeze right across Europe.
Food prices have also jumped. This partly reflects the disruption of wheat exports from Russia and Ukraine, which between them represent a quarter of the world market. But financial speculation is also an important factor. Lighthouse Reports identified a big inflow of money into commodity funds investing in wheat after the start of the Ukraine war.
It points out that cereals production has risen slightly in the past 15 years, while prices have fluctuated wildly, reflecting speculative bets on which way they will move. So the orthodox theory of inflation explains very little about the take-off in price increases. But it is being used to justify the reaction by central banks, which is sharply to increase interest rates. This reflects obsessively repeated fears of a “wage-price spiral”—in other words, workers reacting to higher prices by demanding pay increases to protect their living standards.
This did happen to an extent in the 1970s, when inflation peaked at around 25 percent, much higher levels than are being predicted today. Why is it so feared? Because, as Marx showed, wages and profits are inversely related. If wages rise, profits must fall. So living standards must be squeezed to preserve profits, even if the result is yet another recession. Inflation is really a form of class struggle.