The Return of Inflation

Sep 5, 2021

The following article is taken from the September-October issue (#218) of Lutte de Classe (Class Struggle), the magazine of Lutte Ouvrière (Workers Struggle), the revolutionary workers group (Trotskyist) active in France.

Until the beginning of 2021, the increase of consumer prices as measured by governments had remained a relatively limited phenomenon. This official inflation rate had dropped to zero or even turned negative at the height of the COVID-19 crisis in the spring of 2020. Since the beginning of 2021, this tendency has reversed, and most government inflation indexes are rising.

These indexes give a warped view of the prices of goods. They rely on a basket of goods and services whose prices are calculated every month. The composition of this basket is supposed to represent “household” consumption. It is therefore, at best, only an average between what the richest and poorest layers of the population consume. Be that as it may, these indexes are the only ones at our disposal. And their evolution gives a clear indication of the trend. According to these indexes, the rate of inflation before the crisis of 2020 in the European Union ranged from 1% to 2% per year. Since April 2021, the annual rate of inflation rose above 2%, reaching 2.5% in July. In France, the official figures are lower, but inflation is also on the rise. In the United States, inflation had oscillated between 1.5% and 3% in 2018 and 2019. It has been over 4% since April, estimated at an annual rate of 5.4% this past July. Even if energy and food prices are left out, the official rate still rose by 3.8%, the largest increase since June 1992. There are many other countries besides the United States with rates higher than 5%, like South Africa, India, and Mexico. In July, Brazil’s official rate of inflation was 9% compared with the previous year, Turkey’s was 18%, and Argentina’s was more than 51%. ¹ Although inflation in the latter two countries reflects their particular circumstances dating from before 2020, the overall increase in consumer prices is one of the striking aspects of the capitalist economy in recent months. It is another way for companies to increase their profits at the expense of their customers, especially the broad masses, who cannot pass the rising costs of the goods they consume onto anyone else.

Speculation on Raw Materials

A certain number of newspapers and commentators base their explanation for this increase in prices on a general phenomenon; that is, that the economy is recovering in a disordered manner, with many bottlenecks, including in the production of raw materials, which is not enough to meet market demand after months of inactivity, leading their prices to increase. Fingers are pointed at China, whose production apparatus was the first to recover and which is among the countries with the highest demand for raw materials. The companies that consume these raw materials pass on the costs to their customers, raising the prices of all goods.

This is only a partial explanation, as the example of oil reveals. The sale price per barrel of the benchmark Brent crude on the world market has risen significantly. What was $40 in November 2020, was up to more than $70 in June 2021. Demand is certainly higher now than in 2020, but remains well below what it was at the end of 2019, before the crisis. If prices are rising today, it is because oil-producers are deliberately limiting the supply. Oil production remains lower than current demand, although the capacity for global production is well above market demand in 2019, before the crisis. The Saudi, Russian and U.S. producers are selling a little less, but at much higher prices. Incidentally, this infuses value into the hundreds of millions of barrels stored in the United States and allows industry prices to stay above the point at which oil production remains profitable on U.S. soil.

This decision to limit production and control its increase so that it remains below demand was confirmed on July 18, when the 23 member countries of OPEC, the Organization of Petroleum Exporting Countries, reached an agreement to restrict the monthly rise of oil production to 400,000 barrels per day in the coming months. As for the oil and gas companies, they dispose of means to transfer the rise in prices to consumers, and nothing prevents them from doing so. According to official French statistics, the increase in energy prices represents about half of the rise in consumer prices. Gas prices have reached records at the pump (+17% in one year), and the regulated price of natural gas, which had declined during the height of the crisis, increased by 10% on July 1, 5% more on August 1, and 8% still more on September 1, reaching a level over 15% higher than the price before the crisis. Similar increases are seen in the U.S.

Oil and gas are not the only raw materials whose prices have taken off. The prices of iron, copper, aluminum, and certain precious metals have also risen, as well as agricultural raw materials like wheat, soy and corn, whose prices have all reached levels well above the records of the past five years. The first victims of a sudden rise in food prices are the poorest households, those who devote a major part of their budgets to food, including in developed countries. This higher price is also imposed on countries that depend on such imports. The countries of North Africa and the Middle East represent 4% of the global population, but they account for 30% of wheat purchases on international markets.

The chaos in supply chains is not simply a result of the economic recovery. It is inherent in an economy ruled by the market, where no coordination holds sway other than the law of the strongest, in which each participant can try to exploit any situation by increasing prices and, thus, their profits. Freight costs in international shipping directly impact the prices of many goods. Profiting from a monopoly situation, transport companies have raised their prices.

But supply-and-demand imbalances and monopoly positions are not the only factors explaining price increases. All these transactions take place in financial markets. As in the crisis of 2009, speculation is being fueled by the hundreds of billions of dollars that governments pumped into the system. This speculation boosts the prices of goods, independently of the relation between real supply and demand. Even though cotton producers, for example, have huge reserves, its price has reached record heights. As the newspaper Le Monde reported on May 26: “The considerable volume of liquidities injected by the central banks, which result in the rise of raw materials, have disconnected their prices from market fundamentals, which inflates financial bubbles.” In this situation where money flows freely through financial markets, each rumor, each risk of drought or forecast of shortage, pushes prices to new heights.

The Beginning of a “Supercycle” or Prelude to Deflation?

The cycles of the capitalist economy, the relations between supply and demand, between the quantity of goods produced and of needs, cause prices to vary around their value. They alternate between periods of decline, sometimes brutal, during recessions, and periods of rise, in the phases of economic recovery. These variations result from an economy in which anarchy governs production, where social utility is measured, after the fact, in the market. Furthermore, trusts and monopolies, which have the ability to direct markets, use this fact to organize shortages so that prices rise, using their position to collect veritable superprofits.

These phenomena have accompanied the whole history of the market economy; but since World War I, permanent monetary instability has also impacted prices. Reducing the quantity of precious metal in circulating currency is probably as old as money itself. But after World War I, monetary manipulation took on a whole new dimension. To finance the costs of war and reconstruction, the imperialist governments printed so many bills that they had to sever their currencies from the gold standard. Running the money machine increases the quantity of currency in circulation, which has a tendency to depreciate, causing prices of goods and services to rise. The quantity of money is just one parameter that bourgeois governments must take into account, in addition to the rate of exchange with foreign currencies, international speculation on currency exchanges, the level of government debts, and the ability or belief in the ability of governments to repay these debts. These factors can easily escape government control. One of the most spectacular examples of this was the 1923 hyperinflation in Germany, when wages had to be adjusted twice a day to take account of the depreciation of the currency and the dramatic rise in prices. Another example was the crisis of the 1970s, a result of market saturation and the collapse of an international monetary system stuffed with dollars. Government loans tied to military spending fed inflation in the late 1960s, taking off in the early 1970s as a result of both the rise of raw material prices and then the sums which government spent to help their bourgeoisies confront the crisis. The entire economy was plunged into a state of permanent instability.

Today, even if a certain number of the conditions for an inflation bubble are present, like speculation and massive government debts, the rate of inflation is not—or not yet—that of the 1970s or the 1920s. But how will the situation evolve? There are almost as many contradictory opinions on this question as there are bourgeois economists. Some think that the rise in prices, especially of raw materials, will last. Last May, bankers and brokers specializing in raw materials stated that investments in green technology and electric vehicles would cause raw material prices to rise for a whole period, carrying industrial prices along with them. These bankers even referred to a “supercycle,” predicting a period of price increases lasting over a decade. They are not the only ones who estimate that inflation might linger, or even soar. Lawrence Summers, former Treasury Secretary under Bill Clinton, believes that the real risk for the economy lies in its overheating and an inflation bubble. Such a bubble would involve price increases feeding into each other, wage increases caused by what he calls a labor shortage, and a speculative outburst in the real estate market.

Other raw material specialists have taken the opposite position, predicting that today’s price increases are only temporary, even if this temporary period lasts for a year or several years. They connect inflation to the temporary tensions stemming from a “chaotic restarting of supply chains, which the pandemic brought to a rude halt and which are today subject to heavy demand.” ² Some of them hold that the increase in the prices of raw materials will then be followed by an equivalent decrease with its own risks. In 2015, after several years of raw material prices taking off, their decline brought the economy to the edge of deflation. Given the abundance of available capital, it is certain that, although the passion for raw materials may result in significant investment, this market will quickly become saturated, as it did in 2015.

The Policy of the Central Banks

Whatever ends up happening, the central banks are making policy on a much shorter-term basis than usual. One of their concerns is to avoid any rapid inflation that might lead to a situation as chaotic as the 1970s. They have, at least in theory, several means to fight against inflation, even if these are not always effective. They can restrict access to credit by raising their central rates, which determine the rates at which banks and companies can borrow and lend. Today these are rates close to zero. The Brazilian central bank did exactly that recently. The central banks can also reduce their asset purchases, the sums which they distribute to companies and banks in exchange for securities that the companies and banks want to get rid of. This is simply another means of producing money. The U.S. Federal Reserve is currently talking about doing this, but such an action remains far off. Incidentally, the Fed’s previously stated goal of keeping inflation below 2% has been officially abandoned. A year ago, in August 2020, the Fed announced that, going forward, it would only discuss long-term inflation. At the same time, these same bankers cynically lamented that “we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.” ³ The stock market cheered at the news, which confirmed that the times of easy money would continue. The European Central Bank (ECB) followed in the Fed’s footsteps at the beginning of July 2021. Although it had previously stated its objective of containing inflation at 2%, this target will now be treated as an average taken over an unspecified period. This means that both the Fed and the ECB have for the moment decided to let inflation take its course and continue to run the money machine, to the great benefit of companies and banks.

The policy of the central banks of the rich countries is clear. Betting that dramatic inflation is not about to happen, they are promising capitalists a high rate of profit for the coming period and sending workers the bill. Inflation represents a general transfer of income, with the laboring classes, through a decline in their real wages, paying the costs to maintain big capital’s rates of profit.

The Sliding Scale of Wages

There is nothing new in the idea that raising wages increases inflation, which Lawrence Summers and others have adopted, declaring that any fight for higher wages is useless. That the capitalists, stuffed with their billions, might wish to condemn workers to a miserable portion—this is built into the class struggle. In 1865, Marx had already responded to this kind of argument in Value, Price and Profit. He demonstrated that, contrary to an old preconception, the values of goods, their prices are not determined by wages when supply and demand are balanced. Instead, “the values of commodities, which must ultimately regulate their market prices, are exclusively determined by the total quantities of labor fixed in them, and not by the division of that quantity into paid and unpaid labor,” meaning the division between wages and surplus value. In this way, “since the capitalist and workman have only to divide this limited value, that is, the value measured by the total labor of the working man, the more the one gets the less will the other get, and vice versa.” He concluded from this that, even if temporary price increases are possible, “a general rise of wages would, therefore, result in a fall of the general rate of profit.” Of course, companies constantly look for ways to make up for any fall in the rate of profit by increasing exploitation, using multiple means to lower real wages: such as raising prices, within the limits of competition; increasing productivity; pushing the intensity of work, etc. All of this only demonstrates that the relationship between wages, prices, and profits rests, in the last resort, on the balance of forces between the working class and the bourgeoisie.

The question of wages, which the pandemic put on the back burner, is pushing forward. Wage demands have already taken shape in certain companies, especially those that have announced big profits while freezing wages and cutting benefits. In this situation, revolutionaries must defend the idea that workers must fight to raise wages but also advance goals that, beyond these increases, challenge the absolute power of the capitalists. The situation demands a sliding scale of wages, which would impose on the bosses an automatic raising of wages, keeping pace immediately with price increases. It is a necessity, flowing from the situation and, in reality, it comes down to challenging the power of the bosses, starting with their ability to determine wages.

The idea of a sliding scale of wages is not complicated. But it can only take on its true meaning in situations where the working class is mobilized around this question. This has nothing to do with the sliding scales which bourgeois governments have claimed to establish, as they did in France from the 1950s to 1970s. They served only to allow the government to pretend it was doing something against the collapse of workers’ buying power caused by rampant inflation. Similarly, cost-of-living allowances, included in some union contracts and in Social Security in the United States, served to hold back the struggle of broad sections of the working class to address the question; at the same time, even these protections for part of the working class served to hide the reality, which is that workers’ wages fell further behind.

In a period of rising prices, workers’ buying power can be maintained only by forcing the bourgeoisie to raise wages for the whole working class through lowering its own profits. This means challenging the power of the whole capitalist class over the economy. That the workers manage to control the wages the bourgeoisie should pay them goes in the direction of workers’ control over the companies. This should lead the working class to become conscious that it can and should take charge of running the economy.

¹ OECD iLibrary, Inflation (CPI) Total / Food / Energy, Annual growth rate (%), Sep-2021 or latest available.

² François-Xavier Oliveau, “Inflation? Non, déflation,” Les Échos, July 16, 2021.

³ Jerome H. Powell, “New Economic Challenges and the Fed’s Monetary Policy Review,” August 27, 2020, https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm.