Socialist Worker

What is behind the fears about inflation?

by Alex Callinicos
Issue No. 2757

Inflation is a major concern of global economies.

Inflation is a major concern of global economies. (Pic: Pictures of Money/Flickr)

One issue is dominating discussion of the major economies—inflation. This has to do with both reality and fear.

Reality—the rate at which prices increase is going up. Consumer price inflation in the United States in April rose to 4.2 percent.

In Britain, it more than doubled, to 1.5 percent, according to the Tories’ favoured measure of the rate.

Fear—according to orthodox economic theory, inflation will accelerate. Why? Milton Friedman, an intellectual architect of neoliberalism, made his name during the great inflation of the 1960s and 70s.

He explained it by the quantity theory of money. According to Friedman, the rate of inflation depends on the amount of money in the economy. The more money, the more inflation will rise.

This provided Friedman with a tool for attacking the economic policies pursued by the leading capitalist states after 1945. Governments sought to achieve high growth and low unemployment by adjusting the levels of taxation and spending.

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These policies were futile, Friedman argued. He said the level of employment depends on the wages workers are paid and the productivity they achieve.

Pouring more money into the economy will simply push up the rate of inflation. These arguments justified slashing public spending and attacking organised workers.

The resulting increase in the rate of exploitation in the North, and the inflow of goods made by low-paid workers in the new industrial economies brought inflation down.

But the fear of inflation’s return continues to haunt the leading capitalist economies.

The leading central banks have kept the financial system afloat by creating money and pumping it into the banks in what’s known as quantitative easing. Economists of the ultra‑neoliberal Austrian school have been predicting a take-off of inflation, so far vainly. The reason is that the quantity theory of money is wrong. It focuses on the money supply, but, as both Karl Marx and Maynard Keynes argued, what matters is the demand for money.


You can put money into bank accounts—as the US government is doing with the stimulus cheques to citizens. But they may save it instead of spending it.

Thus quantitative easing has not led to a higher level of investment. The main reason is the comparatively low level of profitability. Corporate executives have preferred to buy back the shares of their companies, which boosts their own wealth.

The resulting stagnation has forced states to radicalise their policies, most recently we have seen the emergence of what is called “monetary finance”.

Governments have hugely increased their spending to keep firms and households going. They have covered this spending by borrowing, by issuing more government bonds. But these bonds have been bought mainly by the central banks, which are effectively creating the extra money governments are spending. The result is a huge increase in the money supply.

Commentators such as Martin Wolf of the Financial Times, who has long vacillated between Keynes and Friedman, are now ringing the alarm bells about inflation.

Are they right? The evidence is ambiguous. It’s only some prices that have risen significantly, and this may just reflect short-term shortages caused by the lockdowns.

What mainstream economists are really scared of is what they call a “wage-price spiral”. In other words, workers react to higher prices by demanding and winning higher wages, and the bosses protect their profits by raising prices further.

This developed in the 1960s and 1970s. There’s no sign of it yet, but there are quite a lot of reports of employers complaining of difficulty in recruiting workers, despite the millions laid off or furloughed.

Interestingly Joe Biden isn’t worried. He said the other day, “Corporate profits are the highest they’ve been in decades, and workers’ pay is the lowest it’s been in 70 years.

“We have more than ample room to raise workers’ pay without raising customer prices.”

This reflects Biden’s agenda of restoring US political stability by reducing inequality. But I don’t think many bosses will agree.

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