Inflation Stays High and No Recession

Speculators took heart from lower headline inflation data, in the US, last Wednesday, as they fantasise that it may mean that the central bank will soon stop tightening monetary policy, and raising rates, so as to return to the days of endless printing of money tokens to inflate the prices of assets. They continue to pray for a recession, so that workers will be dissuaded from demanding higher wages, and firms will desist from accumulating additional capital, so that profits may rise, and interest rates fall, so that, again, asset prices might rise to yet further dizzying heights.

Yet, despite all of the narrative presented by the media, there is no recession, and inflation remains high. As I set out, recently, the fact that the US has been creating around 400,000 additional jobs each month, and, last month, crated more than half a million, shows that there is certainly no recession, in the US, and that the slightly lower figure for GDP, was simply a consequence of a tie-up of capital, as, particularly in a period of sharply rising producer prices, a portion of profit was tied-up to cover the increased cost of replacing consumed materials, energy and so on, which had not been passed on into end prices. That fact is further illustrated when examining the results of actual companies, which, overall, shows continued increase in their sales, and the ISM data continues to show no significant reduction in orders either, nor any reduction in lead times, and the latest durable and producer goods orders reinforced that view. According to Tim Fiore, of ISM, there has never been a recession when the readings on the ISM have been this high.

What can be seen, and what was inevitably going to be the case, is that a lot of those things that did well during lockdowns, are now doing less well, and some significantly so, but that this just indicates a shift of consumption into those areas which consumers were excluded from during lockdowns, or which were constrained. So, now, we see that all of the demand for technology that soared during lockdowns, as people worked from home, consumed home entertainment and so on, has fallen back. That demand for technology combined with the supply constraints that arose from lockdowns and their aftermath, and fed into a global chip shortage. Now, it appears that the chip shortage may be ending, as those factors unwind.

However, a consequence of the chip shortage was that car producers could not get the chips required, and that impacted their own production of new cars. Lead times for new cars are still over a year, and that led many people to buy nearly new, used cars instead. That demand for used cars pushed used car prices up, over the last year or so, massively. The price of ex-showroom cars rose above that of new cars, because it was possible to get the former, and people were prepared to pay a premium for it. But, now, with the chip shortage ending, car makers, as with other consumer durable goods producers, will be able to get the chips they require, and so their own production constraints will ease. As consumers find they can get new cars without needing to wait a year for them, they will shift demand from used to new cars, and so used car prices will drop. In fact, that can be seen already in the latest US inflation data. US used car inflation that was running at 40% is now down to single digits, and rental car inflation that was at 100%, is now even negative, i.e. prices actually falling.

So, these inevitable shifts in consumer spending, and the anomalies created by lockdowns are simply causing the data to be volatile, but the underlying reality remains that, if we take the US economy, employment is expanding at a rapid pace, that means whether hourly wages rise or not, the amount of wages being paid out is increasing rapidly, and those wages are feeding into the demand for additional wage goods. Large amounts of liquidity put into circulation has created inflationary conditions, and monthly variations of some commodities rising in price, whilst others decline, does not change the overall trend. What is more, hourly wage rates are rising, and it has been the lower paid workers that have seen the largest proportional increases in wages, as well as it being in those sectors where the largest number of job openings exist, and where the highest quit rate exists, with workers quickly moving from lower to higher paid jobs.

In fact, the Federal Reserve, when they were presenting the argument for transitory inflation, used the trimmed mean measure of inflation. Using that measure, produced by the Cleveland Fed, both of its measures for the trimmed mean, continue to rise. In fact, they are at the highest level since the series started in 1984! 

Speculators are desperate to convey the narrative that economies are in recession, and so inflation is about to decline, because those are the conditions they require for workers not to get higher wages, and for interest rates to fall, so that asset prices are again inflated. The ruling class consists of such speculators, or “coupon-clippers”, as Marx and Engels described them, i.e. owners of fictitious capital, whose revenues come from interest and rents on those assets, and also from capital gains from rising prices of those assets. In other words, from asset stripping, and eating the seed corn of society.  That is one reason that the bourgeois media purveys these ideas about imminent recession, the other being that many of the middle class journalists employed by it, have themselves prospered from engaging in the purchase of such speculative assets, and from the capital gains arising from their unsustainable rises in prices, which have come purely on the back of central bank liquidity injections.

The difficulty the ruling class has had has been to limit the expansion of the real economy, so that wages and interest rates do not rise, but not to cause it to go into a serious decline, which would itself destroy capital, and undermine profits. After 2008, they sought to achieve that via fiscal austerity, when that had run its course, lockdowns took its place. The most obvious manifestation of that is the zero-Covid policy of the Chinese state, which is desperate to prevent the Chinese economy from overheating, causing its huge asset price bubbles to burst. Recently, it locked down 1 million people, simply on the grounds that just 4 people – who were probably vaccinated, and not even ill – had been recorded as infected with COVID!

More recently, the war in Ukraine has been used to try to depress consumer sentiment, and “animal spirits”. A central component of that was the sharp rises in energy and food prices that arose from NATO's economic war against Russia, and the attempts to boycott Russian exports of oil and gas, grain, fertiliser and so on. The narrative was that soaring prices of these things would lead to workers' disposable income being slashed, so that they would have no scope to continue to demand other wage goods, leading, then, to businesses holding back their own expansion plans. But, that too, like lockdowns, backfired. During lockdowns, the ruling class made sure that the vast majority of labour continued to take place, which is why GDP fell by only around 20%, rather than falling to zero. But, even to achieve that, they were forced to make furlough and other income replacement payments, which they financed by borrowing, with the borrowing itself financed by printing even more money tokens.

With money incomes continuing by these means, and with some spheres of consumption off limits, money hoards built up, and as economies reopened, those hoards began to flow into the real economy. So rising energy and food prices have not prevented workers from also continuing to spend money on other wage goods, and, as employment has increased, the additional wages feed into that demand too. The ruling class counted on the same conditions as during the last 40 years persisting, in which wages would fail to rise, but the sharp rise in demand for labour, particularly in specific areas, led to wages rising by as much as 30%, and though hourly wage rates continue to lag inflation, a series of additional retention and recruitment payments have been made, as firms scrabble for available workers. And, now, across the globe, sensing this firmer ground beneath their feet, as economies expand, workers have joined unions once more, as they see the potential for those unions taking effective action to get higher wages, wherever, employers resist the inevitable.

So, now, ruling classes are seeking another route, and reverting to the measures used during lockdowns. Across Europe, including in the UK, we hear reports that governments are planning, again, to physically shut down the economy, now using the excuse of energy shortages. But, this is nonsense, because any such shortages are deliberate and self-inflicted. As I set out some weeks ago, for example, there is no global shortage of oil, quite the contrary. Oil prices have risen simply because NATO imperialism has tried to boycott Russian oil exports. The US, of course, does not suffer from that. Its oil companies were able to sell oil at much higher prices to Europe, which is why US oil prices then rose, as it was diverted from the US domestic market. But, the main issue facing Europe is gas.

The US pressed Germany not to go ahead with the Nordstream 2 gas pipeline, and eventually Germany capitulated to US imperialism. That of itself, massively reduced potential gas supplies to Europe, so that as with the attempts to boycott Russian oil, it led to higher prices. But, then the EU was pressed by US imperialism to further boycott Russian gas, by additional measures. Some of those measures come within the remit of the wider sanctions imposed on Russia that attempt to prevent it from accessing global payments systems. In a natural response to those sanctions, and exclusions from global payments systems, Russia said that it would require payment for gas in Roubles for all supplies as contracts were renewed.

That a country supplying any commodity should demand payment for those commodities in its own currency, you would think ought to be uncontentious, let alone when that country is facing sanctions on being paid in other currencies, i.e. Dollars. Yet, the EU has made a big issue out of this demand, insisting that it will not pay for its vital gas supplies in Roubles. The consequence is inevitable. On top of having voluntarily reduced its own supplies of gas, via a bite your nose off to spite your face boycott of Russian gas, it now faces even bigger reductions in gas supply, as Russia stops supplying gas, as existing contracts end, and customers refuse to comply with the need to pay in Roubles.

That is a deliberately confected crisis being created by the EU, and European governments. There would be no shortage of gas supply, no reduction in Russian supplies of gas – why would it, its economy needs the revenues from such sales – if the EU would even just agree to pay for those supplies in Roubles! If that were the case, then the threat of businesses closing, as governments impose renewed lockdowns and lockouts over the Winter, to save gas, of people freezing in their homes, would disappear overnight, and what is more, gas prices themselves would fall significantly.

But, of course, that is not what speculators want. They want these conditions of uncertainty, and the potential of lockdowns, if required, so as to slow economies, undermine the strength of workers, as labour shortages emerge, so that they can again create conditions for central banks to stop raising interest rates, and so that they again resort to printing endless quantities of money tokens so that asset prices are inflated. It shows in stark terms the reality of just what a pernicious role the ruling class, comprised of these speculators, and owners of fictitious capital now play, even in relation to the real capital upon which the economy, and well-being of society depends. Their short term greed for paper money capital gains from asset price inflation, now leads them to demand that the real economy and real capital be sacrificed on the altar of such speculation. As Marx put it,

“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

(Capital III, Chapter 33)

The talk of power cuts, of three-day weeks over the Winter, are all of a part with the hysterical comments at the height of the COVID moral panic that there would be mass burials and cremations etc. The reality is that no such closures are likely, and, as described above, certainly none are actually required, unless the conditions are deliberately created for that to be the case. Not that the speculators will be worried if they are, however, because, they will no doubt have jetted off to the sun, during any harsh Winter, or be lounging on their luxury yachts, whilst the rest of us contend with the misery they have inflicted.