UK Inflation Doubles in a Month

UK inflation has doubled in the last month, going from 0.7% to 1.5%, as against the same month last year. As I've pointed out previously, even this reading grossly understates the real level of inflation, because a) it is based upon a basket of goods many of which have been unavailable to consumers during lockouts, but misses out, or under-represents, other goods and services that consumer have bought during that period, whose prices have risen sharply, and b) because it is a backward looking measure, rather than measuring the way inflation is likely to end up on the basis of current trends. For example, if the month on month rise of 0.7% is projected forward for a year, that would give an annual rise in inflation of around 10%. Already, some measures of inflation taking into account the effects of lockouts have calculated annual inflation of around 10%. It rather blows out of the water the arguments put by Michael Roberts in a recent WW article. I will be responding to his article in detail in the near future.

Even on the basis of the existing measurement of inflation, it is flattered by the effects of a number of government measures. If the effects of these were removed, and they will end unless renewed, in coming months, inflation, last month, would have risen to 3.2%, as against the same month last year. That would be the highest in nine years. But its not the absolute level of inflation that is significant, here, but the rate of change. Its that which gives the indication of the future much higher levels of inflation that are coming, and indication that, contrary to the claims of the Federal Reserve and Bank of England, this is not simply transitory, but has already become embedded, and systemic. It illustrates, once more, contrary to Michael Roberts' argument, that as Marx described in A Contribution To The Critique of Political Economy, inflation is a monetary phenomenon.

Inflation arises when the money commodity, for example, gold, rapidly falls in value, and so its exchange value against all other commodities, the basis of their money price falls suddenly. That happened when the Spanish brought back gold and silver plundered from South and Central America, or when large new gold fields were opened up in California, Australia and Alaska. It also arises if gold is replaced as the money commodity by silver.

“Thus, if the value of gold, i.e. the labour-time required for its production, were to increase or to decrease, then the prices of commodities would rise or fall in inverse proportion and, provided the velocity remained unchanged, this general rise or fall in prices would necessitate a larger or smaller amount of gold for the circulation of the same amount of commodities. The result would be similar if the previous standard of value were to be replaced by a more valuable or a less valuable metal. For instance, when, in deference to its creditors and impelled by fear of the effect the discovery of gold in California and Australia might have, Holland replaced gold currency by silver currency, 14 to 15 times more silver was required than formerly was required of gold to circulate the same volume of commodities.”

(ibid)

If the currency unit is given a name, such as £1, then, as in the case of replacing gold with silver, here, nominal prices would rise to 14 or 15 times their previous nominal levels – inflation. But, the same applies when the currency takes the form not of the money commodity itself, but of tokens representing it, be those tokens gold, silver, or copper coins, or base metal coins, or paper notes. As Marx describes, in the case of these money tokens, it is no longer their material composition that is determinant, but the quantity of them put into circulation. Again, its not just a question of the quantity of tokens put into circulation, but this quantity relative to the value/social labour-time they purport to represent.

“The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity."

(ibid) 

In his article, Michael Roberts says that the amount of money in circulation is determined by the value of commodities it is to circulate. That is correct, as Marx sets out in A Contribution, and if too much money is put into circulation, it is removed either by being hoarded, or being melted down into bullion etc. However, as Marx sets out, this is no longer true in the case of money tokens, in which these conditions appear inverted. In other words, precisely because money tokens are themselves worthless (in the case of gold or silver coins they only have the value of their material content, which may be a fraction of their nominal value), as is apparent with paper notes, they cannot be withdrawn from circulation in the same way, and melted down for their intrinsic value. If too many of them are in circulation, then the effect becomes the same as if gold were replaced by silver as the money commodity. In other words, the value of the token becomes devalued, and so, as the measure of prices, the only consequence can be that prices themselves are increased.

Roberts is right that its not as simple as that, because, as Keynes also pointed out, simply putting more currency into circulation does not mean it will be taken up. If economic activity is depressed for good reason, simply reducing official interest rates or increasing liquidity is like pushing on a piece of string. The additional liquidity simply piles up in bank deposits, resulting in the velocity of circulation being slowed. But, the liquidity usually does find an outlet. If it isn't used for the purchase of commodities, it gets used for the purchase of assets, as happened from the 1980's, when increased liquidity fed directly into pushing up the prices of speculative assets such as shares, bonds and property. In other words, the inflation is simply manifested as an inflation, in fact hyper-inflation, of asset prices rather than commodity prices. After 1987, when the bubble in those asset prices burst, central banks deliberately diverted excess liquidity into the purchase of such assets, which form the main, almost sole, form in which the ruling class owns its wealth. Its measures to direct liquidity into the purchase of assets, simultaneously drained liquidity from the real economy, slowing its growth, and creating disinflationary conditions for commodity prices.

But, in current conditions, the liquidity has been directly channelled into financing consumption, and even unproductive consumption. It is that which has stimulated monetary demand for goods and services, and, as firms begin to open up once more, with existing stocks having been run down, they can only respond to a surge in monetary demand by raising prices, which the excess of liquidity sloshing around the system enables them to do. They have to respond by rapidly trying to find new additional workers, as well as new supplies of materials and so on, which acts to push up wages, and raw material prices. That has been seen in the doubling, and more, of nearly all raw material prices over recent weeks and months. That, in turn, stimulates economic activity further, which acts to increase demand for labour and materials even more, rapidly soaking up the excess liquidity already in existence, and so pushing price levels higher still.

With firms having run down balance sheets, over the last year, during lockouts, they have little in the way of accumulated profits or cash balances to cover these additional purchases. They have to borrow, and the huge amounts of liquidity enable that borrowing to occur stimulating the levels of liquidity, and of inflation even more. But, the increased borrowing, means that the demand for money-capital, relative to the supply of money-capital, as against the increase in liquidity, means that interest rates rise. Even in the highly manipulated bond markets, where central banks keep bond prices high, and so yields suppressed, via bond buying, this is becoming manifest, as even those bond prices have started to fall, and yields to rise. The rising interest rates, means that the capitalised value of assets is falling, leading to inevitable capital losses, for the owners of speculative assets – shares, bonds, property, Bitcoin etc. - despite attempt by central banks and governments to keep them inflated. As the penny drops that big capital losses are looming, owners of those assets will seek to get out ahead of it, and that will mean that even more liquidity, currently tied up in them, will be released, deflating asset prices, whilst inflating commodity prices.

Money will begin to flow into real productive activity, as booming monetary demand pushes up money profits, and that will create a virtuous circle, as the increased real investment in productive-capital will lead to more employment, more demand for goods and services and so on, but will further push up prices, whilst beginning to squeeze profit rates, as wage share rises. Firms needing to expand and invest so as not to lose out to competitors as the market expands rapidly, but seeing their profit rates falling, and so their ability to finance the expansion internally declining, will need to borrow more, pushing interest rates higher again. That will cause asset prices to crash even harder.