Inflation Surges, Wages Are Next

US Consumer price inflation has spiked higher again. The headline rate rose in January to 7.5% compared to 7% in December. It was also higher than the predicted figure of 7.3%. The figure is the highest since 1982, showing that, contrary to the predictions of central bankers, and others, this inflation is not transitory, but is heading firmly back to the conditions last seen in the 1970's. Its also clear that this inflation is not some temporary phenomenon driven by supply bottlenecks, as some on the Left, like Michael Roberts, have suggested. Roberts wrote this week in the Weekly Worker,

“inflation rates are rising in all the major economies, driven partly by increased consumer demand, but mostly by supply-chain bottlenecks, particularly in fossil fuel, energy and food commodities.”

Well, its good to see Roberts acknowledging that consumer demand is rising sharply, because its only a few weeks ago that he was repeating his old tune that, falling profits were going to result in yet another recession, to add to the dozen or so others he has been predicting each year for the last decade, at least. In fact, rising demand does not lead to higher prices unless surplus money tokens or credit are put into circulation. And, it clearly is not supply chain bottlenecks that are responsible either. In his Bloomberg Letter, John Authers notes that services inflation is also at a 30 year high, and services does not process materials, so is not affected by such bottlenecks. What services do rely upon is lots of labour, and it is, now, labour that is in short supply, causing wage costs to rise.

Roberts argument is essentially the Keynesian view of inflation, as being caused by either demand pull, or cost-push inflation. As Marx describes, neither of these can cause inflation. If demand rises, but no additional money is put into circulation, prices will remain the same, because the demand for money will also rise, causing the same effect on the money commodity. Nor does rising costs lead to higher prices, unless additional currency is put into circulation. If productivity falls, causing costs to rise, so that the value of materials rises, then this passes through into the value of commodities. If the quantity of commodities in circulation remains the same, whilst their value increases, this necessitates more money being put into circulation, and on this basis, the price of commodities – their exchange value against money – rises, but that is not inflation.

Moreover, as Marx sets out, in Value, Price and Profit, if wages rise, this does not lead to inflation. The value of commodities is comprised as follows. Firstly there is the value of the constant capital, consisting of congealed labour, and in addition there is the new value created by current labour in processing this constant capital. If the value of the former rises, then this passes through directly into the value of the commodity, because this represents an increase in the labour required for its production. But, in respect of the latter, its only if productivity falls, and more of this current labour is required that this leads to an increase in the value of the commodity. For example, if 10 hours labour is required to produce the constant capital consumed in a commodity, and 10 hours of current labour process it, the value of the commodity is equal to 20 hours. If the former rises to 12 hours, the value of the commodity rises to 22 hours, and if the labour required in processing rises to 12 hours, it rises to 24 hours. But, a rise in wages, is not a rise in the amount of labour required to produce this commodity, it is only a rise in the value of labour-power, or in the market price of labour.

Suppose, that the 10 hours of labour required for production divides into 5 hours of necessary labour, equal to wages, and 5 hours of surplus labour, equal to profits. If wages rise to be equal to 6 hours of labour, this does not change the labour required to produce this commodity, which is still 10. It simply means that, now, out of that 10 hours, 6 is paid as wages, leaving only 4 to be paid as profits. It represents a fall in the rate of surplus value. Similarly, in other periods, capital may be able to extend the working-day to say 12 hours, whilst keeping wages at 5 hours, so that profits would rise to be equal to 7 hours. It would not affect the price of the commodity itself.

However, in practice, central banks, because they are there to protect the interests of capital, respond to such situations where wages are rising, and so threatening to squeeze profits as described above. They print additional money tokens, so that they are devalued as against commodities, which results in inflation. The inflation enables firms to raise prices to compensate themselves for their rising costs, which, for them amounts to not just the costs of materials, but also the cost of wages. They seek to maintain their money profits, and rate of profit, by raising prices. They can only do so, if the currency supply is increased appropriately, and central banks oblige them in that respect. That is what leads to a price-wage spiral such as was seen in the 1970's and early 1980's.

It becomes an exercise in leapfrogging as workers seek to raise their wages to compensate for rising prices, whilst firms then try to compensate for rising costs, by raising prices, and the central bank is left enabling the process, by putting increasing amounts of currency into circulation. At some points, wages will leapfrog over the higher prices, as workers, seeing where inflation is going, try to get ahead of it by demanding above inflation pay rises, at other times, in between wage negotiations, for example, prices will leapfrog back over wages. In order to try to protect workers living standards in such periods, the demand for a sliding scale of wages has been raised, so that each month, as workers calculate the rise in their living costs, they demand at least the same increase in wages. In the 1970's, in an attempt to prevent workers taking such measures into their own hands, the Heath Government, in Britain, introduced such a scheme, implemented by the state.  In Italy, which had a perennial problem with inflation, unions negotiated the Scala Mobile.

But, any such situation, threatens to simply escalate out of control, because it necessitates a ratchet effect of ever higher prices, resulting in ever higher wages, causing ever higher costs, and so on. In certain times, workers will inevitably lose out, and at all times those on fixed incomes will lose out, because they have no means of ensuring that their pensions, benefits and so on rise in line with prices. In the 1920's, as a period of long wave crisis that was turning into a period of stagnation that ran into the mid 1930's, workers inevitably lost out, as seen with the Weimar inflation, but also in the falls in wages in Britain that provoked the action of the Triple Alliance, and the 1926 General Strike.

Similarly, in the early 1980's, as capital responded to the crisis of overproduction, by introducing new labour-saving technologies, workers again found themselves on the defensive, and wages failed to keep pace with rising prices. But, at other times, conditions favour labour, not capital. In Value, Price and Profit, for example, Marx describes the conditions in the USA, where there was a shortage of labour. It meant that wages were high, and, in addition, many of the workers, who were immigrants, used these wages to save money to buy land, and so turn themselves again into independent peasant producers, so that capital continually found itself with labour being in short supply. It was why US capital, needed, from the beginning, to use machines wherever possible in place of labour, as well as continuing to draw in immigrants.

A similar thing is described by Marx in relation to the situation between 1849-59 in Britain, where large numbers of agricultural workers left the land to take up jobs in industry, as well as in railway and other construction. The capitalist farmers facing rising wages, could not pass on these higher costs in higher prices, because, after 1848, the Corn Laws had been abolished, and British agriculture faced competition from cheaper continental production. They had to simply accept the squeeze on their profits that resulted, but again showing the fallacy of Michael Roberts arguments in relation to profits and investment, what the farmers did in response to these squeezed profits was precisely to invest more! They invested more in machines, so that they required less labour, and could then reduce wages, and they sought to maximise the effectiveness of those machines, by amalgamating farms so as to produce on a larger scale, taking advantage of economies of scale.

A similar thing happened in the 1960's. By the 1960's, many of the productivity benefits resulting from the technological revolution of the 1920/30's, had started to wane. But, the economy was booming, and one reason it was booming was that more workers were being employed, and as productivity no longer increased so fast, proportionately more workers had to be employed to achieve any given increase in output. More workers employed, meant more wages, meaning more demand for wage goods, meaning capital needed to expand further, and so employ more workers. By the 1960's, even with all of the additions to the workforce resulting from married women joining the workforce, from an increased population from the Baby Boom, and from immigration, the demand for labour was such that unemployment fell to between 1-2%.  Calculated on the current basis, that would be more like 0.5%. In effect, it was full employment with only the frictional unemployment of people moving from one job to another making up the numbers. And, that meant that people could move almost at will from one job to another, in search of better wages and so on. Where, in the 1950's workers had responded to improved economic conditions by accepting offers from employers to work overtime, now the conditions meant that they could demand to work fewer hours, to have more holidays, but without any loss of pay, as they demanded better hourly wages, and better holiday pay.

In addition, they demanded improvements in the social wage, the payment of their wages in truck by the state in the form of better education, healthcare and so on. That was noticeable in the US, with the Great Society project of LBJ, for example. All of that increase in the wage share, caused a squeeze on profits, and it was possible, because of this relative shortage of labour. And, today, unlike the 1920's and 1980's, we have the same kinds of conditions that existed in the 1960's. We have an increasing relative shortage of labour, and that in itself is causing wages to rise. As wages rise, again, that feeds through into an increased demand for wage goods, requiring firms to expand and so take on additional workers – particularly in the labour intensive services industries – which feeds into higher wages, and so on.

The truth is that the lockdowns and lockouts have simply speeded up processes that were already underway. Lockdowns did not cause the death of the High Street. That process was already well underway, because online retailing was already massively undercutting it, and providing a better, more modern alternative. Lockdowns simply speeded up that process as consumers, unable to go out to bricks and mortar retailers, turned to the available online alternatives. Having done so, and found it cheaper, and more convenient, they are not likely to go back. But, all of the talk about supply chains, is really also a manifestation of the fact that the productivity gains from globalisation are already mostly behind us, just as the productivity gains from the technological revolution of the 1980's, from the microchip are mostly behind us.

There is plenty of scope for those technological developments to find their way into new consumer products, just as has happened with every set of technological developments in past long wave cycles, but that is not the same as that technology now being able to bring about the kind of big reductions in costs it did in the past. We will have a big expansion in new consumer products in technology based healthcare, for example, and all of these will provide the basis for workers to spend their increased wages on these commodities, driving the economic expansion of the next 10-20 years, but it will take place in conditions of rising wage share, and, eventually, a squeeze on profits, similar to that which led to the crisis of the 1970's.

And, the same thing is being seen across the globe. Inflation in the EU has also surged forward, meaning that the ECB now has to consider raising its policy rates, just as the Bank of England has done, and as the Federal Reserve is about to do. In the UK, the Bank of England claims that inflation will peak at 7.25% in the Spring, but it is also assuming that workers will simply sit back and see their living standards cut as this goes on. Indeed, if we were to believe the line being given by many of the pundits, and by Labour politicians, workers have no say in this matter, and will just have to suck it up. For opportunists like Starmer and Reeves, that is the best outcome, because the last thing they want to see is a rise in workers militancy, let alone workers taking matters into their own hands. The idea of a failing Tory government, which simply enables them to argue for workers to vote for them as the alternative – an alternative, which on all past experience, and based on the identity of the positions being offered by the PLP and the Tories is no alternative at all – is the kind of facile approach we have come to expect.

But, there is no reason to expect that workers will do any such thing. Wages are rising fast, simply on the basis of a shortage of labour, which has required firms to offer much higher wages just to attract workers. Not only have haulage companies been led to increase wages by around 30%, but entire fleets of local council bin lorry drivers have been recruited by them. With wages in hospitality having risen by 18%, we can expect to see many public sector workers from social care, to school staff, to NHS workers doing the same, especially if the government tries to impose below inflation pay rises on them. But, such conditions make it inevitable that, as unions begin to undertake annual pay negotiations, in the Spring, any idea by Andrew Bailey, Rachel Reeves, or anyone else, that workers are going to moderate their claims, and accept a pay cut is ridiculous.

Workers are unlikely to strike in conditions where they think they will be unsuccessful, but those are not the conditions that exist today. In the US, last month, payrolls rose by nearly half a million, way above estimates, and what is more, the December jobs number was revised up from 150,000 to also about half a million, meaning the US has added 1 million jobs in the last 2 months alone.  That is before it properly comes out of its lockdowns.  Firms are not going to lose production, as a result of a strike, in conditions where that means losing large amounts of profits, and where surging demand means they will lose market share to their competitors. In conditions of rapidly rising money profits, and where they see demand continuing to rise sharply, and the ability to further recoup costs in higher prices, firms will simply pay up. That is what happened in 2008, when lorry divers got a 14% pay rise after just a 2 day strike, despite the fact that politicians and the media were claiming that the pay claim was ridiculously unachievable.

The reality, in the US and UK, is that workers real cost of living is already rising at over 10%, and that figure is going to go higher from here. In Britain, Brexit has considerably increased costs, and reduced the profitability of British business, which they will also try to recoup in higher prices. On top of all that, there are much higher energy prices on the way, increases in monthly mortgage payments, as well as much higher taxes, as National Insurance is increased. To compensate for that workers are going to need pay rises of 15-20%, and I can't believe, as a former union negotiator, that union officials, at rank and file level, are not already factoring that into their demands for the coming wage rounds.

Of course, when firms concede those pay claims, as they undoubtedly will, in current conditions, they will do so with one eye on the ability to recoup the cost in higher prices, as they see demand for their goods and services continuing to surge, as lockdowns are lifted. Central banks will no doubt facilitate that by making liquidity available, even as they continue to raise their policy rates. The consequence of that is going to be that large firms finance expansion out of profits, and additional share issues, whilst many smaller businesses – the so called zombie businesses – will go under, as they face higher interest charges. But, that, in turn, will bring about a further concentration and centralisation of capital. That will help to improve productivity as a lot of that capital tied up by inefficient small businesses is released, and will enable the workers tied into those low paying small firms to get jobs with larger, better paying businesses.

The period ahead is one of significantly rising economic growth, whilst higher interest rates, and a return to share issuance to finance capital accumulation, means that asset prices are set to crash, again releasing liquidity from unproductive speculation into the real economy.  As wages rise, and leapfrog over prices, firms will seek to recoup the costs in yet higher prices.  It means, we again need to demand a sliding scale of wages be negotiated as a class wide demand by the TUC, so as to protect all workers, including those on fixed incomes.  And, its clear that the official inflation data does not accurately reflect the real increase in workers' cost of living.  In the 1920's, Trades Councils, notably the London Trades Council, worked alongside the Co-ops, and Committees of housewives to monitor prices, and establish a workers cost of living index as the basis for their demands for pay rises.  Today, local TUC's should do the same working with local Co-ops, establishing committees of workers and pensioners, and socialist economists, to monitor price rises, and develop a workers' cost of living index, as the basis for demanding monthly wage, pensions and benefits rises, backed by the TUC in class wide industrial action if required.

For A Workers Cost of Living Index Calculated by Committees of Workers, Pensioners, Co-ops and Socialist Economists - For A Sliding Scale of Wages, Pensions and Benefits To Protect Workers Living Standards