Jerome Powell, Federal Reserve Chair, was opposed to this narrative until recently. He claimed that rising prices are a temporary problem caused by supply chain shocks from pandemic. But, eventually, things will return to normal. But now the Fed has shifted course and is preparing to institute policies to “cool off the economy” — a euphemism for shrinking the money supply in order to drive down business investment and thus scale back job growth.
Inflation is simply an increase in the price of goods or services. If prices rise quickly, and outpace wage growth, this can cause problems for working families — even those who don’t drink 12 gallons of milk per week. However, the media narrative on rising inflation has conveniently ignored several important points.
First, the prices of some of our biggest expenses — health care, housing, higher education to name a few — have been risingMany times, it has been happening for decades without any discussion or concern from the punditry. The country’s leading cause of bankruptcy is in fact its high health care costs. Global food prices have also been rising due to the effects of climate change on crop yields. Easing these kinds of costs — through a nationalized health care system, investment in affordable housing, student debt relief and decarbonization — would go a much longer way toward improving working people’s finances than monetary policies to tighten economic growth.
Second, although it’s true that there has been a noticeable uptick in prices (measured by the annual change on the consumer price index) by 6.8 percent over the last year, this is still not very high by historical standards. The rate of inflation in the United States has been between 11-13% since the 1970s, when it was at its highest. It’s also the case that measures of current price increases are skewed by a few sectors of the economy, most notably the energy sector.
An alternative measure that is more useful is to compare the rise in prices with the state of wages. Our relative purchasing power will decline if prices rise faster than wages. However, if wages are rising at the same rate as inflation or surpassing inflation, then our purchasing ability stays the same or increases. The reverse is true, too. The reverse is also true. Inflation rates have remained low for most of the last decade, but wages have increased, which means that working people’s purchasing power has declined despite low inflation rates.
Today, wages are finally increasing. The New York Times recently reportedAbout 13 percent of workers have not received pay increases this year, and many retirees get pensions that are consistent. But it has been “middle- and high-income earners whose pay gains were least likely to have kept up with inflation. Over the 12 months that ended in September, those in the top quarter of earners experienced 2.7 percent gains in hourly earnings, compared with 4.8 percent for the lowest quarter of earners.” The combination of wage increases and COVID-19 relief checks have put more money in the pockets of the bottom half of earners than they had at the start of the pandemic.
The media spin has largely ignored the elephant in the room. It is business owners that are raising prices. They are making record profits, so does that mean they should raise prices? The answer to this question ultimately reveals that inflation is a question of class politics — which class gains at whose expense — rather than technical monetary policies.
What is Inflation and Where Does it Come From?
Inflation refers to an increase in prices that is generalized throughout the economy. It does not include the rise of one specific good, but goods that are found across large swathes of the economy.
How is this possible? The simple explanation is that inflation is caused by too many dollars chasing too few goods. That is, if demand for goods and services exceeds the world’s capacity to supply those goods and services, this creates an upward pressure on prices. Businesses can charge more to consumers than they need because consumers are competing for a limited supply.
Today’s rapid opening of economies after lockdowns has led to increased demand for goods and services. This is far more than the rate at which supply chain have gone online. The free market allows producers of items in short supply to “pick their price,” as anyone looking to buy a used car right now knows.
This can also lead a good old-fashioned price gouging. Due to the cratering fuel demand, the oil industry, for example, cut production during the pandemic. Now, the demand is back up Bloomberg News reports, “oil companies are keeping production flat while using profits to reward shareholders.” And although wholesale prices of oil have fallen somewhat, retail gas stations are still selling gas at high prices. “When wholesale prices decline rapidly, it provides a window for retail operators to sell at high prices for a few weeks before lowering prices,” oil storage broker Tank Tiger CEO Ernie Barsamian told Bloomberg. He stated that gas prices will eventually drop, but for now many refiners, and gas stations, are enjoying higher profits.
The other half of the inflationary equation is the role of increased workers’ wages. In a situation like today’s, when wages have begun rising, this will drive up demand for goods as workers have more money to spend. Higher wages can also increase the cost of production for employers. Arguments suggest that higher wages for workers can reduce profit margins and cause capitalists to pass these additional costs on to consumers.
Mainstream economists believe that even if there is an external factor (a spike or chokehold in oil prices due o geopolitical shifts) it will not impact the price of oil. TriggersThe primary reason for any increase in prices and ultimately higher wages is the rise of prices. ContinuedInflationary trends Mainstream economics draws the line between higher wages, and low unemployment rates. Workers who are not easily replaced in a tight labor market have more bargaining power and can demand higher wages.
This line of argument was first championed by economist Milton Friedman, who stated that a ”natural rate of unemployment” exists below which inflation begins to take off. Friedman’s “monetarist” ideas took hold after the inflationary crisis of the 1970s, and ever since have been used as a battering ram against policies in which governments actively promote full employment or better jobs for workers.
Conservatives can see a point in one sense. Karl Marx himself similarly argued that capitalism depends on unemployment — a “reserve army of labor” — to keep workers desperate enough to agree to whatever terms of work they can get. In other words, unemployment is a way of preventing wages from increasing so much that they threaten profitability.
Economic pundits often avoid asking the question: What if, instead of raising prices businesses made do with smaller profit margins? U.S. corporations have been posting record profits and the highest margins since 1950, making them one of the most profitable in the world. John Deere was the site of the most prominent strike this year. Bloomberg News reports, “workers held out to get a 10% raise, yet the company is still expected to earn even more next year than the record profit it posted [in November].”
Workers don’t set prices, the bosses do. They do so in order to maintain the largest profit margins. If workers’ wages go up but prices stay the same, this would simply mean that a greater share of profits went to workers rather than capitalists. System-wide, workers’ share of the economic pie (i.e., the “national income”) would increase. Falling unemployment, rising wages and increased social spending does not have to automatically translate into inflation of prices if we allow bosses’ profit margins and their share of the national income to decrease.
Even the dire rates of inflation in the 1970s, in the context of a strong labor movement “hurt capital more than it did workers, while neoliberal repression of workers’ power has kept inflation low from the 1980s onward,” sociologists Ho-fung Hung and Daniel Thompson have argued. Inflation is therefore a question of class conflict, who benefits at what cost?
This is not to say that inflationary pulls aren’t a problem; if prices of common goods rise much faster than wages, or if the spikes in inflation are so high that businesses aren’t able to operate smoothly and fall into bankruptcy, laying off workers, this could have dire consequences. The cures are often worse than the disease. The U.S. ruling Class, headed by President Ronald Reagan, and Fed Chair Paul Volcker, was willing to create a severe recession to stop inflation in response to the 1970s crisis. The ensuing decades were marked by unprecedented levels of class inequality.
However, there are other tools that can stop inflation. Price controls have been used in wartime throughout U.S. history, most significantly by President Franklin Delano Roosevelt’s administration. As political scientist Todd Tucker recently pointed out, FDR employed 160,000 federal employees in the Office of Price Administration to control prices “on goods from scrap steel to shoes to milk.” Even President Richard NixonPrice controls were briefly introduced.
Rent control, expanding Medicare and allowing the government negotiate lower drug prices are all good options. Other reforms such as investments in public housing or public education indirectly cap the prices.
A left economic agenda must fight against inflation panic, maintain demands for higher wages, and increase social spending. real inflation through price controls and policies that protect working people’s pockets.