But, capital seeks moderate levels of inflation each year, for other reasons. If prices fall each year, then consumers see the potential to be able to buy any commodity at a cheaper price, simply by waiting to buy it. Such action inevitably reduces aggregate demand, and slows economic growth, and can become a vicious circle of the kind that Japan has been experiencing for the last 30 years, despite pumping huge amounts of excess liquidity into circulation during that period. That excess liquidity, instead of going into the real economy, went into additional savings, as well as into pushing up Japanese asset prices that had crashed by up to 90% in 1990. That illustrates the point, cited by Marx, in quoting Thomas Tooke,
“"The Bank has no power of its own volition to extend the amount of its circulation in the hands of the public; but it has the power of reducing the amount of the notes in the hands of the public, not however without a very violent operation."”
(Capital III, Chapter 33)
This is the point made by Keynes in response to the argument that economic activity could be stimulated by reducing policy rates, and increasing liquidity that without the demand for that liquidity from rising aggregate demand, it is like pushing on a string. In Japan, with an elderly and ageing population, saving to cover retirement, and with negative interest rates on those savings, instead of vast amounts of liquidity encouraging additional consumer spending, it simply encourages further saving – to compensate for the negative rates of interest – with the savers believing that, with falling prices, those savings will still be worth more in real terms, in the future. Even with large amounts of fiscal spending by the Japanese government, it is not enough to increase aggregate demand sufficiently to drive liquidity into the real economy, and so inflate commodity prices.
In fact, an increase in Japanese policy rates, and curtailment of liquidity might be more effective, because a large amount of Japanese savings is tied up in Japanese Government Bonds, which continued to increase in price as a result of QE, providing capital gains for bondholders. A sharp fall in Japanese bonds would provoke Japanese savers to sell them, and to look to use the proceeds to buy real, rather than fictitious assets, and to increase current consumption.
The reason QE successfully inflated asset prices by astronomical amounts is that the additional liquidity did not just sit in savings deposits, slowing the velocity of circulation, but was directed by the state into the purchase of those assets, and the same is true with the liquidity produced during lockdowns that has been fed directly into the bank accounts of consumers, available, now, for them to spend, and which has flooded into the real economy driving inflation of commodity prices. Even Japan is now seeing its inflation rate go from negative to more than 2.5% overnight.
What is more, oligopolies operate in such a way that if one reduces its prices, its competitors will follow it, as each seeks to avoid losing market share. Such price wars are lethal for the profits and rates of profit, whereas, if one oligopoly raises its prices, its competitors will not automatically follow suit, again, because they seek to gain competitive advantage, and market share. It is much easier for this to happen in conditions of a generally inflating level of prices, than where prices are generally falling, and each firm is led to do so.
The general tendency, therefore, in relation to constant capital is for its value to fall, consistently. Annual increases in social productivity, reduces the value of materials, and of machines/fixed capital, and technological developments reduce the value of fixed capital even more significantly, with a corresponding effect on the value of the fixed capital stock via moral depreciation. The fall in the value of materials passes directly into a fall in the value of end products, whilst the fall in the value of fixed capital passes into the value of end products via a fall in the value of wear and tear. If we take oil, then despite its recent spike, due to NATO's attempts to impose an embargo on Russian exports, in inflation adjusted terms, it is cheaper today than it was in the 1970's, despite the fact that, back, then, it was being said that there was only another 50 year supply of it left!
And, even if it were the case that increased values of constant capital led to rising prices of commodities, and so to also an increase in the cost of living of workers/value of labour-power/wages, those higher wages, as has been demonstrated, do not lead to higher prices, but to lower profits. Its only increased liquidity, provided by central banks to try to enable firms to protect their squeezed profits from rising wages that leads to such a price-wage spiral.
The increases in prices, therefore, are not a consequence of rising costs of production/values, but of a fall in the value of money tokens relative to commodities.
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