This Low Inflation Will Not Last

UK CPI inflation fell in December to 0.5%, according to the ONS, down from 1.0% in November.  According to the ONS, the main reason for the fall was statistical - "The main contributions to the fall came from the December 2013 gas and electricity price rises falling out of the calculation..." Labour has announced that when it comes into government in May, it intends to work with the ONS to develop a new measure of the cost of living, as it actually affects workers, because its clear that the existing measures give a distorted picture of the extent to which workers' living standards are falling. Not only do the current figures give such a distorted picture, but even the official low inflation will not last long.

Prices, are the result of a relation between two different values - the value of one commodity, whose price is being determined, and the value of the money commodity.  Marx describes money, as the Universal Equivalent Form of value, in other words, it is a given quantity of abstract labour-time manifest in a physical form.  The price of the commodity is merely the quantity of this money commodity that is equal to the value of the commodity whose price is being determined.  The price of the commodity can, therefore, move up or down as a result of a change in either the value of the commodity itself, or the value of the money commodity, which acts as the unit of measurement.  If the value of the money commodity falls, then the price of all other commodities, everything else being equal, will rise and vice versa.

But, as Marx points out, commodity producing societies quickly began to use money tokens rather than a money commodity itself, because such tokens bear, on their face, the quantity of this money commodity they represent, which means that the task of weighing it, each time an exchange is required, can then be done away with.  Even where such money tokens take the form of gold coins, they are still just tokens, because frequently these coins, in reality, do not contain the weight of gold that their face value indicates.

Yet, the fact that they continued to circulate, and represent the value they were supposed to contain, formed the basis of being able to replace the use of precious metals in these coins, with less precious metals, and later with paper notes.  But, this did not change the fundamental relation between the value of the money commodity these tokens represented, and the value of the commodities whose prices it was determining.  The commodities value was still equivalent to a certain quantity of labour-time, just as was that of the money-commodity, and the relation between them, therefore, remained as before.  What it did change was that the value of these tokens was itself then determined by how many of them were put into circulation.

If only sufficient tokens were put into circulation as to represent the value of the money commodity they replaced, these tokens would have the same value as the money commodity - for example gold - they represented.  In other words, the total value of commodities to be circulated is equal to a given quantity of labour-time, and the equivalent form of this value, represented by money, can only also, thereby be represented by the same amount of labour-time.  But, if more of these tokens are put into circulation than that, the actual value of each token would thereby be reduced, so that the total value of tokens in circulation was no greater than the total value of the money commodity they represented. It is when this happens, that there is inflation.  All prices appear as a greater quantity of these devalued money tokens.

The amount of the money commodity that needs to be put into circulation, then depends, Marx explains, on the total value of commodities to be circulated (in fact Marx's more developed theory of money goes further than this because he also brings into account the fact that money is required to cover payments, i.e. the situation where commodities are bought, but only paid for later, and the situation where credit results in money only being required to cover the net payments to be made) and the value of the money commodity itself, and finally on the velocity of circulation.  In other words, a single £1 coin can circulate £10 of commodities, if it takes part in ten separate transactions during the year.

But, this leads us to ask what determines these values.  That has been set out elsewhere, as being a function of the labour-time required for production.  But, for any commodity, this labour-time has also been separated out into the labour-time required to produce the machines, materials and so on, that constitutes the constant capital, and the labour-time required to actually process these materials, using the machines and other fixed capital, into the new product.  This latter period of time, itself divides in two, one part of the new value created by the labour-power, is required to reproduce the labour-power itself, the other part is appropriated free by capital, as surplus value.

It is this division that is the reason why the current low level of inflation will not last.  The basis of the change in values is changes in productivity.  As set out in the discussion on the long wave, these changes in productivity are not themselves, arbitrary, accidental events, but are driven by real material conditions.  For example if wages rise to levels whereby the rate of surplus value is falling, causing profit margins to be squeezed, and the potential for crises of overproduction to occur, capital will seek to remove this constraint, by developing new labour saving technologies, that create relative surplus population, and which act to reduce wages and raise the rate of surplus value, and profit margins.

But, as that analysis of the long wave also demonstrates, market prices themselves can vary up and down, not just because of changes in values, but because of changes in supply and demand.  We have gone through a long period, since the start of the new long wave boom in 1999, when global demand has outstripped supply for many primary products, such as oil, copper, foodstuffs, and other agricultural raw materials.  The consequence of that was large rises in the prices of these primary products.  The effect of those price rises on final product prices, i.e. on the prices of manufactured commodities, was limited for two reasons with the same basis - rising productivity.

Rising productivity, based on the introduction of new technologies, meant that the quantity of primary products used for each unit of output was reduced, so that even as the price of the primary product rose, the cost per unit of that product rose by a smaller proportion.  In terms of oil, more efficient engines, boilers etc. meant that more energy was produced for any given amount of oil burned.  But, also the value of many commodities fell dramatically because that rise in productivity also meant that significantly less labour-time was required to process the primary products into the end product.  The same was true about the transportation of commodities across the globe.

If the value of a commodity is made up:

c 1000 + v 5000 + s 5000 = 11,000,

this value can still fall even if the price of the materials rises significantly provided that increased productivity causes the amount of living labour required to process it, to fall, so

c 2000 + v 3000 + s 3000 = 8,000.

Although, the price of the primary products constituting the constant capital has doubled, and the labour-time required to process it into the final product has fallen by only 40%, the consequence is still a 30% plus fall in the value of the end product.

However, as set out in examining the fall in oil prices, the high prices and profits from oil production, resulting from this inability for supply to rise sufficiently to meet demand, could only ever be a temporary situation.  In every previous long wave cycle, it has resulted in large scale investment in primary product production, be it minerals, or agricultural production, with the consequence that eventually, a large amount of additional supply floods on to the market sending market prices sharply downwards, just as the previous lack of supply had sent them up.

It is not just the price of oil that has fallen, which shows that this pattern has been repeated.  The price of agricultural products has followed the same pattern.  There is a Global milk glut causing prices to show the same amount of overproduction as with oil.  The price of a litre of milk is now less than for a litre of water!

However, as set out in analysing the long wave, this global glut of primary products tends to be relatively short lived.  I expect oil prices to go into a short term parabolic decline down to around $20-25 per barrel, but this will drive some marginal producers in the North Sea and elsewhere out of business.  About 20% of rigs in Canada have already been shut down, and investment in new exploration and development has more or less ceased.  The usual concentration and centralisation will follow, with large companies picking up large amounts of fixed capital, and sunk capital for next to nothing.  The consequence will be that the global price of production of oil will fall, as the cost of production is thereby reduced.  I expect that it may take until next year, for global oil prices to stabilise at a new long-term market price between $70-90 a barrel, with a long period in between where market prices are between $40-70.

But, also as set out, in the analysis of the long wave, as the cycle moves into this Summer phase the advantages from rising productivity obtained in the Winter and Spring phases of the cycle, begin to run out.  Although, the sharp rise in the market price of primary products comes to a halt, the previous continuous falls in the values of manufactured commodities resulting from rapidly rising productivity also ceases.

As described on previous occasions, it has only been the massive rise in productivity, and consequent fall in commodity values that resulted, along with the shift of production to China and other low wage economies, that meant that the massive increase in the circulation of money tokens did not result in huge amounts of consumer price inflation.  But, with slowing global productivity gains, rapidly rising wages in China and elsewhere, and the eventual stabilisation and gradual rise in primary product prices, once the current overproduction is unwound, the huge oceans of liquidity that continue to slosh around the global economy will quickly push commodity prices higher.  In certain economies, whose currencies have fallen, that is already happening.

When that reversal happens in the US, UK and EU central banks will be found to be way behind the curve, and without the means to deal with the inflationary spiral that hits them.  Probably long before that global bond investors will see it coming causing a sharp rise in bond yields, and market interest rates.  When that happens, the 2008 financial crisis will appear to have been simply a minor disturbance.