China's Producer Price Index Surges 9%

In the latest sign that global inflation is surging and becoming embedded, China's Producer Price Index rose, last month, by 9%, as against the same time last year. It is the biggest increase since the boom period of 2008, when it rose by 9.13%. The rise is a reflection of the rise in primary product prices that I have discussed in recent weeks, and reflected in the fact that the Bloomberg Commodity Price Index has also risen to the same peak level it reached in 2008, as the new long wave uptrend caused surging demand for inputs.

Previous months data, across the globe, has shown rising input costs for firms, but has been held back, to an extent, because of falling energy costs. Now energy costs are rising sharply too, as I wrote recently. In 2014, as new oil supply came on stream, with the introduction of shale and so on, oil prices fell as low as $25 a barrel. The same kinds of falls occurred with other primary products for the same reason, as described by Marx in Theories of Surplus Value, Chapter 9, where he discusses this aspect of the long wave cycle, in relation to the development of large-scale new supplies through the opening up of new lands for agriculture and mineral extraction, and the need for infrastructure and large-scale fixed capital investment that goes with it. It takes more than a decade for such large-scale investment to become a sunk cost, and for the new supplies to come fully on stream, as lower cost production. The process requires the froth to be blown off the market as this new supply comes on stream, pushing market prices, for a time, below the market value/price of production. The less efficient production is then cleared out, and the excess supply disappears, leaving demand and supply at higher levels than previously, but at lower market prices.

That is what has been seen since 2016, as global prices began to rise again, before the effects of Brexit and Trump's trade war slowed global trade and growth temporarily, and before the government imposed lockouts and lock downs of 2020/21 cratered economic activity. But, despite all attempts to subdue it, by all the fiscal austerity introduced after 2010, all of the QE by central banks to massively inflate asset prices, and so divert money out of the real economy into reckless gambling, all of the government policies to artificially inflate demand for houses at already ridiculously inflated prices, the underlying mechanism of the long wave cycle has forced its way through once more, pushing up global economic activity, increasing the size of the global working-class, and with it the demand for wage goods, which, in turn, has stimulated, via competition, the need for capital accumulation, and a further upward twist in the process of the long wave uptrend.

The fact that primary product prices have reached the peaks they hit as the initial surge of the long wave uptrend saw demand outstrip supply, is a reflection of the sharp pace at which the global economy has rebounded following the sharp contractions caused by the government imposed lockouts and lock downs. But, it is also a reflection of the fact that, vast oceans of liquidity have been pumped into the global economy over the last thirty years to inflate asset prices every time that bubbles burst, and in the last year, even more liquidity has been injected at the very time that the new value created in the economy was contracted as a result of the government imposed lockouts. The equation set out by Marx in A Contribution to the Critique of Political Economy, for how much money should be put into circulation, is quite simple.

Assume the money commodity is gold. The value of an ounce of gold is 10 hours of labour. If the total value of commodities to be circulated is 1,000 hours of labour, then 100 ounces of gold are its equivalent, and would need to be used as currency, assuming that each ounce of gold acted only once. In other words that is the value of commodities to be circulated divided by the value of a unit of the money commodity gives the number of such units required. However, this is not the way the actual exchange of commodities and money occurs. The commodities are not all exchanged in one go against the money, in other words, just one transaction, but occurs in the form of lots of individual exchanges, some taking place simultaneously, some serially, i.e. one after another. If A buys a commodity from B, whilst simultaneously B, buys from C, and simultaneously C buys from A, A must hand an ounce of gold to B, whilst B has handed an ounce of gold to C, and C has handed an ounce of gold to A. So, 3 ounces of gold would be required. However, if A buys from B, and hands them an ounce of gold, B when they buy from C, can use this same ounce of gold to pay C, who then uses this same ounce of gold to buy from A. In this case, these three separate transactions, representing a value of 30 hours of labour, have been conducted using just 1 ounce of gold.

So, the equation needs to be modified so that, as Marx says, what is required is to take the average value of the commodities to be circulated, and to multiply it by this number of transactions. But, similarly, the unit of money used as currency acts several times, as shown above, and so the actual number of currency units in circulation is reduced by dividing by the number of times, on average, each unit is exchanged, the velocity of circulation. So, the equation becomes PT = MV. If we give the ounce of gold the name £1, then the value of commodities to be circulated was 1,000 hours, which we can now call £100. If we assume that each ounce of gold performs 10 transactions during the year, then 10 ounces of gold is required as currency, i.e. £10.

Now, in a fiat currency system, these 10 ounces of gold are replaced by money tokens. It doesn't matter whether these tokens are themselves gold coins, silver coins, or paper notes. The fact is they simply act as representatives of this same £10, or 10 ounces of gold, which itself is a proxy for 100 hours of social labour-time, each token representing 10 hours of social labour-time. If, however, the state prints and puts into circulation 20 such tokens, as against the 10 it should have printed, these tokens continue to circulate, and yet, no more labour has been undertaken, no more value has been created, so now the above equation is upset. The way it is resolved, is that each token is itself devalued by 50%, so that the total value represented by the tokens remains the same, i.e. 100 hours of labour. But, on the face of each token is printed the word £1, which is now twice what the actual value of each token represents. The only way of resolving this contradiction is then that the prices of each commodity must also be doubled, so that the value 1,000 of social labour-time, which was manifest in a total price of £100, is now manifest in a total price of £200. As Marx says, this price in Pounds is merely a change in nomenclature. If I measure a football pitch as being 300 feet, rather than 100 yards, it is similarly merely a change of nomenclature. The actual length of the field has not changed.

If we consider what happened during the lockouts, then, the amount of labour undertaken was reduced considerably – by about 20% according to the GDP data – and so, on the basis of Marx's formula, the consequence should have been that the amount of currency in circulation was reduced. In fact, the opposite occurred. Rather than reducing the amount of currency in circulation – liquidity – central banks massively increased liquidity. They handed large amounts of it to governments who used it to hand to citizens to spend, although the lockouts themselves meant that the opportunities for them to spend were heavily curtailed, meaning it was not surprising that large amounts of that additional liquidity then sat in bank accounts, or went to pay down the large amounts of credit card debt that households had. Yet, the fact was that rather than contracting liquidity in response to a sharp reduction in the value of commodities being circulated, it was increased. And, at the same time that the lockouts were reducing the supply of commodities, as workers were forced to stop work, this same increase in liquidity created additional monetary demand for this reduced supply! It doesn't require a Masters degree in Economics to understand what the consequence of such action is going to be.

For one thing, anything that consumers could spend money on saw its prices rising. The trouble was that many of those things either don't appear in the cost of living indices, or else if they do they were grossly under-represented given these new spending patterns. All the things that consumers do normally spend money on, and which form a large component of those indices, were ones that they could no longer buy, and so the prices of those things fell, as demand collapsed. That caused consumer price indices to be a huge fiction, because they appeared to show falling prices – for all those things that consumers usually buy, but now couldn't, but failed to include the rapidly rising prices of all those things that consumers now actually were buying. And, when any restrictions were lifted, this same phenomenon was seen. The prices at hairdressers shot up as soon as people were allowed by the government to get their hair cut; car prices shot up when people could go to buy cars, and so on.

The more that opening up occurred, the more this process washed out into the economy, as monetary demand rose abruptly, whilst supply was still constrained as a result of lockouts, and workers being furloughed. The first response is to raise prices. As businesses sought to increase output, and having more or less completely dissipated their stocks during the lockouts, they had to quickly replenish them, sending orders flooding to manufacturers, who in turn sent orders to raw material producers, including the producers of primary products, be they agricultural products or oil, gas and minerals. All those prices, have then surged, which, in turn, feeds into producer prices.

Its only a few days ago that I commented on oil prices rising above $70, but already the price of Brent is above $72. In the Chinese Producer Price data, its notable that for China’s petroleum and natural gas extraction industry prices rose by 99.1%, and for oil, coal and other fuel-processers, they increased by 34.3% I've pointed out previously that prices of copper have risen so much that some Chinese users of copper have had to cut back their production, because they could not pass on the additional costs in their own final prices, even though the surging global inflation has also lifted all final product prices. The same thing is being seen across a range of industries, with manufacturers having to absorb some of the increased input costs out of their profits, in order to keep producing at the levels required for efficient production. That is the same scenario that Marx describes in Capital III, Chapter 6.

The rise in primary product prices has some way to go yet, before supply responds to the high prices. It will not take the fourteen years it took after 1999, because all of the new production facility has now been created, but it will take several months, for all of that capacity to be properly mobilised. Meanwhile, the surplus liquidity pumped into circulation will continue to wash through the system, lifting all boats. As it washes again into consumer prices, that will give headroom for producers to raise prices, and again expand production. The full effects on wages are not yet being felt. As businesses reopen, and scramble for labour, they are being forced to pay higher wages. As the latest US jobs data showed, US hourly wages are rising by more than 6% a year. Some of that passes on into the wages of existing workers, but the big increases are going to come when workers everywhere come to negotiate wages for the coming year. With economies booming, and creating the potential for large increases in profits, firms are not going to baulk, given the large amount of liquidity available, at conceding large pay rises to avoid disruption, especially as they will find it hard to argue with workers who point to the huge rises in inflation going on all around them, and obvious for all to see.

As normal, the increased costs are not affecting all businesses equally. The smaller Chinese businesses are affected worst, as their profit margins are on average being squeezed 2% points lower than those of larger capitals. The increased economic activity will accommodate that for now, but the obvious conclusion from this will be further concentration and centralisation of capital, as the bigger capitals take over the smaller ones, and apply their own economies of scale, to reduce costs, and so enable a further expansion of supply to meet demand. China continues to face opposition from the US, and now under Biden, with his better relations to the EU than existed under Trump, China is also facing opposition from the EU, both of which are using China's human rights abuses as the pretext for their growing economic war against the rising power.

The US and EU are the largest markets on the planet, and so any restriction on Chinese sales to those economies will be troublesome. But, they can't completely crater their trade with China without seriously damaging their own economies given the extent to which they rely on China as a manufacturing centre, dependent on its huge reserves of cheap unskilled and semi-skilled labour. Indeed, the profits of some of the US and EU based multinationals, operating in China, depend on that too. Offsetting any reduction in trade with the US and EU, will be the fact that China has built strong ties with primary product producers in Latin America and Africa. With soaring primary product prices that provides big increases in revenues for those economies, which will be looking for consumer goods to buy, which China will be only too happy to provide. The Chinese Yuan has also been rising sharply in previous weeks, leading to the authorities seeking to check its rise so as not to damage Chinese exports. However, as primary product and raw material prices continue to rise, China may well see an advantage in a further rise in the Yuan, so as to limit any effect of imported inflation.