US Inflation Stays High

Speculators, and their representatives in the media, had been counting on yesterday's release of US inflation data to show that US inflation was starting to fall. They were disappointed. Its true the headline, year on year, figures for CPI and Core CPI, dropped slightly, but, not only was that due entirely to the mechanics of calculating the annual figure, with lower figures from a year ago dropping out, the drop itself was much less than had been estimated, let alone hoped for. In fact, looking at the current data, there is evidence of the inflation rising, not falling, and also becoming more entrenched.

Speculators hoped that the figures would give some grounds for arguing that the Federal Reserve will not need to raise its policy rates much further, or be too hawkish in removing liquidity, because that is the only prospect they have for asset prices not continuing to crater. Stock markets have been falling for five weeks, with the NASDAQ now down 30% from its peak, the S&P down 17%, and the DOW down around 15% from its peak. Those are big numbers, meaning that these markets are in bear market territory (a bear market is down 20% from its peak), but, in reality, is simply an indication of just how ridiculously inflated they had become, and, particularly, in the last two years of lockdowns, when central banks had increased liquidity by ever more ludicrous amounts, at the same time that new value creation was being reduced.

Speculators were encouraged, last week, in their hopes that central banks would limit their rate increases, and policy tightening, when the Federal Reserve limited its rate increase to fifty basis points, and downplayed suggestions that it might raise rates by 75 basis points at its next meeting. Even so, speculators were considering the likelihood that central banks and governments might have to act to create a recession, in order to reduce the demand for labour and capital, so as to cause wages and interest rates to fall, so that they could again begin to enjoy protection of their paper wealth, in the form of grotesquely inflated asset prices. Yesterday's inflation data, also bolstered by today's producer price and employment data, indicates that inflation and job growth is not going to slow any time soon, and so stock markets have sold off further.

The US inflation rate rose by 8.3% compared with a year earlier, which is down from 8.5% the previous month. However, estimates had been for it to fall to 8.1%. The reason for the fall is almost entirely statistical, because lower figures from a year ago, dropped out of the calculation, so that the increase over the last year, does not seem to be so great. This, as I have set out before, is a problem of calculating on the basis of historic data, as a guide to future data. More hope for the speculators, did, however, come from that more recent data, as the month on month figure rose by 0.3% as against a whopping 1.2% in the previous month. However, even that was 50% higher than the estimate of a 0.2% increase. Taking an average of the last three months, gives a monthly increase of 0.78%, which if continued for the year ahead would mean inflation a year from now of around 9.36%. That would scotch the speculator's hopes that inflation has peaked, and there is every reason to think that will be the case.

As with most things, inflation never simply rises in a straight line. It comes in waves. There are periods when inflation appears to have stopped rising so fast – which obviously is not the same as it or prices falling – only then for it to begin rising faster again, and often at an even faster pace than before. That is because all prices in the global economy are interconnected, but rises in one sphere do not immediately become reflected in another, only showing up some time later, rather like with a tsunami. With some prices, a large increase can cause demand destruction, as consumers reduce their consumption.

The media has given a lot of publicity to the loss of Ukrainian grain exports, in causing world food prices to rise, but Ukraine is only the world's fifth largest exporter. The biggest is Russia, accounting for more than twice as much as Ukraine. As NATO's economic war against Russia, and its blockade of Russian products such as grain, oil and gas and so on, has massively pushed up world prices, and caused increasing shortages that are impacting the world's poorest, so that means that available incomes are soaked up in buying those products, and are not then available for demand for other products. That has the effect of dampening economic growth in total, but also, by demand destruction of these other products, of putting downward pressure on their market prices. This is one reason we have seen economic growth slow in the last few months.

However, as I have written before, this is not the 1980's, when workers were on the back foot, as labour-saving technologies replaced them in the workplace, and when a period of stagnation got underway, with gross output growing noticeably slower than net output. Despite all attempts to slow economic growth, and so the demand for labour and capital, the underlying dynamic of the long wave uptrend continues to force its way through. Not only have we seen spectacular growth of the global workforce, but, in many developed economies, we have conditions that begin to approach full employment, and in which the natural action of supply and demand for labour-power pushes up wages, as, in order to attract workers out of retirement, to work overtime and so on, employers have to pay much higher wages, and as workers see rising prices, in those conditions, they demand not just rising nominal wages, but rising real wages too. That effect has yet to impose itself, but it will.

The latest US jobless claims numbers were slightly above estimates, but within the region of rounding errors, given the current high level of employment, with 2 job vacancies for every unemployed worker. Indeed, in these conditions, rises in jobless claims can simply be a result of a rise in the quit rate, as workers, confident in being able to get another better paid job, just quit their existing job, and move to a better higher paid one. The employment cost index for the last quarter was up 1.4%, compared to just 1% in the previous quarter, although hourly wage rises moderated, which again is probably due to statistical factors. One of the first things that happens in such periods is that workers are asked to work more overtime and so on, only at a point where labour is really in short supply, do workers first demand much higher premiums for overtime, and then higher normal hourly rates.

As Marx describes, higher wages do not cause inflation. The consequence of higher wages is squeezed profits. But, as Marx also sets out in Capital III, when firms see sharply rising economic activity, they can expand, even if central banks do not increase liquidity. They do so, because, as Marx says, these increases in production can be achieved out of the elasticity of the productive relations. With labour-power itself, the process is fairly obvious and straightforward. Because workers are paid in arrears, mostly, now, a month in arrears, a large number of workers can be taken on without any increase in costs, or wages. The worker works for a month, creating new value of X, which is recouped in the sales of the firm, providing it with the money required to pay the wages of, say, X/2, and also profits of X/2, for the firm.

The firm will require to buy circulating constant capital, in the form of materials, but this too is bought and paid for only later. So, the firm can expand its purchases of labour and materials, without any requirement to actually advance any additional money-capital. It achieves this simply on the basis of an expansion of commercial credit. Its suppliers do the same, expanding their own production by employing additional workers, paid in arrears, and buying additional materials with commercial credit. As Marx describes, in periods of rising economic activity, this commercial credit expands along with capital, completely unaffected by any measures that central banks might take in relation to policy rates, or liquidity. The commercial credit itself represents additional liquidity put into the system, outside any actions of the central bank or commercial banking system. Its why, in times of expanded economic activity, the banking system is limited in being able to constrain that expansion, unless it is prepared to cause an economic recession by creating a credit crunch. But, that would require policy rates much higher than currently exist, and would cause asset prices to collapse much sooner than they would be able to slow economic growth.

But, as I have said previously, the reality is that central banks, seeing wages rise, and squeeze profits, are not going to curtail liquidity, even as they continue to raise their policy rates. Higher wages do not cause inflation, they squeeze profits, but central banks, to offset the squeezed profits, print more money tokens, and it is those additional money tokens, which then leads to further inflation, and then as prices rise, workers again seek to be compensated for them, via higher wages, thereby, setting in a price-wage spiral. We are at the start of that process, which is why this is not the peak of inflation, but simply one wave within an ongoing tsunami.

As John Authers has pointed out in his Bloomberg Newsletter, and as I have referred to before, the US Federal Reserve, last year, when it was trying to convince markets that inflation was merely transitory, put forward another measure of inflation, called the trimmed mean, which took off outlying figures. But, that figure too, shows that, far from inflation peaking, it is continuing to rise, and become entrenched, as set out above. The Cleveland Fed publishes a trimmed mean core inflation and median inflation figure, which goes back to 1983. Both figures are at their highest levels ever, and the trimmed mean figure is higher than that of the median.

Authers also cites the data from the Atlanta Fed, for “sticky prices”. That is for those goods and services that have to be set well in advance, and which then tend not to fall backwards quickly. Again that is at a 30 year high, and worse for the proponents of peak inflation, the one month figure is significantly higher than the 12 month figure, indicating that rather than moderating, the price pressure is intensifying.

The picture is better in relation to flexible price inflation, that is prices of goods whose prices move up and down more quickly. However, the year on year figure is still showing inflation of 20%. It will be in this sphere that the next wave of inflationary pressures will flow through in coming weeks and months, as a new round of rising material prices, along with higher wages, increase costs in this sphere, and get passed through into end prices.

What is more, as economies open up following lockdowns, the strongest growth is now in services, and services inflation is rising sharply. Moreover, services, by definition are more labour intensive, and so its in these areas that the growing labour shortages show through most noticeably, and in which rising wages will also have most effect.

Central banks will be led to continue to print money tokens to prevent a sharp squeeze on profits from rising wages, even as they also have to continue to raise policy rates, and will have to do so for longer, and to higher levels than they anticipate, as inflation continues to drag on for several years into the future. So, the hopes of speculators that they might be saved from a further collapse in their paper wealth is forlorn. The latest collapse in the prices of worthless assets such as Bitcoin, and other cryptocurrencies, NTF's and such like is totemic of the bursting of these asset price bubbles that were inflated on nothing but the hot air, of central bank QE.

Nor can the speculators take much hope from the idea that governments might again rescue them by destroying economic growth with policies of austerity and so on. Governments have to contend with electorates, all of whom became restive with the last round of austerity imposed to cover the costs of bailing out the owners of fictitious capital, when their paper wealth was destroyed in the 2008 financial meltdown. They are not going to get away with it again. The hapless Biden already looks set to be another one term President, and to have led the Democrats into a crushing defeat from the jaws of victory. He talks about protecting families from the effects of inflation, just as hapless conservative social-democrats bleat a similar tune in Britain, but the reality is there is nothing they can do about it. In fact, they are in large part to blame for it, as a result of pursuing policies of QE, and asset price inflation over the last 30 years, of thinking they could simply pick the fruit of the Magic Money Tree to resolve every issue, and in promoting their insane policy of lockdowns over the last two years.

Its also a bit rich for Biden to talk about rising living costs, given that, as set out earlier, a large part of rising raw material and food costs, globally is a result of NATO imperialism's economic war against Russia, and attempts to blockade the sales of Russian primary products on the world market, thereby, pushing up those prices. But, Biden will try to buy votes for Democrats as the US elections approach, in the Autumn, meaning more not less government spending, and that will put further upward pressure on the economy, sending wages and interest rates higher not lower. Indeed, the best hope the Democrats have, is that this increased economic activity will result naturally in higher wages and living standards, again confounding the expectations that workers will not be able to compensate for rising prices. Already, the US as with other NATO countries has spent hundreds of billions of Dollars on military hardware to use in its proxy war against Russia, being fought out on Ukrainian territory, and at the expense of Ukrainian lives.

Another factor is going to be seasonal factors. At the moment, Europe and North America is still not enjoying the benefits of Summer. The massive rise in gas prices resulting from the embargoes and other restrictions put on Russian gas exports, has hit consumer pockets, leaving them with less to spend on other items. They will eventually compensate for that with higher wages. In the meantime, as Summer takes hold, the demand for gas will reduce considerably, so that a large part of that spending will be released for other commodities. In Europe and North America, people will begin to organise holidays and travel, and so on, and that will give a renewed boost to economic activity.

The hopes of causing a recessions, which the speculators and their media representatives now openly proclaim as their hope to rescue their paper wealth, seem small, but the prospects of continued rising interest rates and of the bursting of the huge asset price bubbles across the globe, now looks inevitable.