In August, speculators rejoiced, and financial markets rose, as they saw US headline inflation dip slightly, even though narrower measures of inflation, such as the trimmed mean, continued to rise to multi decade highs. We had seen “peak inflation”, we were told, just as the year before we were told that inflation was only “transitory”. The speculators saw signs that this meant that the Federal Reserve would soon be cutting rather than raising rates, and printing more money tokens under cover of the recession they had been calling for to restrain wages. The bear market rally was actually the start of new bull market, they claimed. Oh dear! This month's inflation data showed it continuing to rise, and US stock markets sold off by between 3-5%, whilst bond yields soared to new recent highs.
The headline inflation figure did, indeed, drop again, to 8.3% from 8.5%, compared to 9.1% in June, but predictions had been for it to drop to 8.1%. However, the month on month figure rose slightly, by 0.1%, whereas in July the figure had been zero. But, what really spooked the speculators was the figure for core CPI, month on month. It doubled from 0.3% to 0.6%. That would put core CPI for the year ahead way above the figure that the central bank has been predicting, and using as the basis for determining the neutral Fed Funds Rate. Core CPI rose 6.3% year on year, compared to 5.9% in the previous two months, and the highest since March. It is the third highest reading over the last year, and not at all the kind of thing speculators were looking for.
The strong inflation data comes on top of the other strong US data on jobs, I discussed a couple of weeks ago, and comes alongside other strong data on retail sales and ISM. On Thursday, that continued with initial jobless claims for the week falling to 213,000, continuing the downward trend, and emphasising the strength of the labour market. Retail sales also rose o.3% on the month, as against expectations they would be flat. The Federal Reserve, like other central banks has been trying to slow the economy, even at the risk of a recession, so as to inhibit wage growth, which would squeeze profits, as well as stimulate additional demand, which would cause firms to have to accumulate additional capital, causing interest rates, to rise. They are trying to do with interest rates, and media narratives, what previously was done with austerity, and lockdowns. However, with inflation at over 8%, and interest rates at just 2.5%, that means they are actually at -5.5%, in real terms.
Even if you assume that households and small firms pay double or even treble that to borrow themselves, they have an incentive to borrow to spend, now, not to mention an incentive to spend rather than save, given that savings deposit rates are much lower than borrowing rates. But, also, as I have set out previously, households, other than the poorest, do not borrow to consume day to day items. They buy them out of wages, and although hourly wages show declines in real terms, household incomes are rising, because around 9 million more workers are employed, earning wages where they had none, and millions more are working full-time rather than part-time, whilst other are working overtime. So, they have plenty of scope to continue consuming day to day items such as food, entertainment and so on.
Its only with larger durable items that borrowing enters the equation, and, even there, because many of those items have become cheaper, and as households have savings, boosted by depressed spending during lockdowns, they have money to buy them without borrowing. The only large items really affected by interest rates are houses, and the price of houses is going to crash, along with other asset prices, for the reasons I have set out in the past. It is one way that liquidity, previously drained from the real economy into asset markets, will now move out of asset markets into the real economy, itself feeding higher commodity price inflation.
And, for businesses, a similar thing applies. For day to day circulating capital, they accumulate it via an expansion of commercial credit. Additional workers are employed who bring in additional sales revenues usually long before they have to be paid wages; materials, energy and so on are bought but only paid for 30 days later, and so on. Its only large fixed capital investments where additional borrowing is required, and so where interest rates are a factor, but with high rates of profit, expanding sales, and inflation guaranteeing higher, nominal prices and profits, the current levels of interest rates offer no barrier to such borrowing, and its notable that many larger companies have rushed to capital markets to borrow at these rates, before rates move higher still. For some items of fixed capital, they can even be bought from retained profit, rather than borrowing.
But, as I have also set out, because bourgeois economics doe not understand inflation – because it does not understand money and value – even if central banks had slowed economies that would not have slowed inflation. Indeed, unless they actually reduced the amount of money tokens and credit in the economy, it could even cause it to move higher, leading to stagflation! In the 1980's, Volcker's interest rate hikes appeared to cure inflation by inducing recession, but that is not what actually happened. In the 1980's a technological revolution, induced by the squeeze on profits caused by a labour shortage, and rising wages in the 1960's and 70's, meant that workers were put on the back foot. A recession was underway anyway, as technology replaced labour, and new cheaper machines replaced several older, more expensive machines. So, wages fell, profits rose, and firms were able to raise prices without workers being able to respond with demands for higher wages. That is why, interest rates soon began their long secular decline in the 1980's.
That is not the conditions that exist today. Today is like the late 1950's, or early 1960's. Then the technological revolution that peaked in 1935, was 25-30 years in the past. Today, the technological revolution that peaked in 1985 is 37 years in the past. At both times, that meant that rather than large amounts of new technology coming in to replace labour and older technology, its just more of the same technology being rolled out in production – though not in types of consumption goods.
So, productivity is not rising fast, and labour is not replaced. On the contrary any expansion of output, especially in services, requires more labour, even if its employed alongside more fixed capital. Expansion leads to increased labour shortages and higher wages. And, that also means that, unlike the 1980's, when firms raise prices, workers will demand higher wages to at least compensate, so profits will be squeezed unless prices are raised further, leading to a price-wage spiral. If central banks did tighten money supply the result would be a squeeze on profits, not a recession.
Were it not that NATO is forcing Europe to undergo a possible recession, as it cuts itself off from Russian energy supplies, on the altar of US imperialism, the same would be true in Europe too, and in China, were it not deliberately slowing its economy via its zero-COVID policy. None of these things are sustainable, and will all fall apart, in one way or another, under the weight of their increasing contradictions, not least of which is going to be the response of the working-class itself.
The Chinese workers are not going to accept forever the zero-Covid nonsense purveyed by the Chinese state. Locking down millions on the basis of a dozen people testing positive for Covid, even while not being ill, is ludicrous, and there will never be a time when someone in a country, especially one the size of China does not test positive. And, as Winter approaches, workers in Europe, already on the march against rising prices, and attempts to hold down their wages, are not going to sit idly by as they face their homes being cut off from heat and light, and their jobs destroyed, as factories shut to comply with EU mandated energy rationing! They will not do so particularly, when they know that lots of cheap energy could be provided simply by opening up the Nordstream2 pipeline!
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| Between 1965 and 1982, as interest rates rose, as profits were squeezed by rising wages, whilst inflation rose, as central banks increased liquidity, asset prices fell, in inflation adjusted terms. They only began to rise, and did so spectacularly, after 1982, when wages fell, profits rose, and interest rates fell. Between 1980 and 2000, the DOW rose by 1300%, even though the US GDP rose by only 250%. |
When all of that dam breaks, demand in economies will increase dramatically, causing even greater labour shortages and wage rises. Central banks will not sit idly by as profits are squeezed. They will inject liquidity to allow prices to rise, even if not as much as wages, so that profits will be squeezed more gently, over a prolonged period, as in the 1960's and 70's, and the consequence will be higher interest rates and lower asset prices, particularly lower asset prices in real terms.
In the US, as I have described previously, it is lower paid workers, in unskilled jobs where they can easily move from type of employment, one employer, to another that have seen the largest wage rises. They are the ones most likely to spend a high proportion of these wages, stimulating demand for wage goods further, but as the economy continues to expand, and labour shortages deepen, all employers will have to pay higher wages voluntarily to attract workers, or involuntarily as they face strikes. Its that the speculators, and the central banks serving their interests dread.
But, its not just the core inflation data that is a nightmare for speculators. Biden, who had opportunistically crowed over the slight drop in the headline number the previous month, was silent about this month's data, and, now, he faces the prospect of gasoline and heating oil prices rising, as we move to the mid-term elections, because the Strategic Petroleum Reserve has now been run down, and must be replenished in coming months, probably at much higher prices, due to NATO imperialism's economic war against Russia.
John Authers, in his Bloomberg newsletter, gives the following chart showing various measures of core CPI, and they are all pointing upwards. As he says,
“The following chart shows:
- The Cleveland Fed’s “trimmed mean” inflation rate, which excludes the components that have moved the most in each direction and takes the average of the rest;
- The Cleveland Fed’s “median” inflation rate, which simply takes the median rate from all the components in the consumer price index;
- The Atlanta Fed’s “sticky” price inflation rate, which tracks goods and services whose prices cannot easily be changed;
- The classic “core” measure that excludes food and energy from the headline CPI, to omit categories over which monetary policy has least control; and
- The Services Excluding Energy Services indicator, which gauges inflation in the cost of services.
All of these measures rose. All except the core inflation measure, which rose but remains below its peak from March this year, are at fresh highs for this cycle, and at their highest in decades. A year ago, the fact that these measures remained largely under control was a key point of evidence for those who believed inflation was transitory. Now, they suggest it could be very much more long-lived:”
The data not only shows that the pressure of rising prices is becoming more widespread, but that it is rising fastest in relation to services, which now account for around 80% of the economy, and many of which were shut down by lockdowns for two years, and only now starting to get back in full swing. Commentators on Bloomberg recently noted that the seats on aeroplanes are all fully booked, and, as we know, airports are cancelling flights, because they do not have the workers to deal with the traffic. That is even whilst we still have some of the restrictions on travel left over from lockdowns, and whilst China and its more than 1 billion people remain locked down.
The inflation is not going away soon, the calculations of neutral or terminal rates by central banks are based on totally unrealistic claims about where inflation is going to be in a year's time, and so their policy rates would have to rise considerably to even just be less negative in real terms. If they raised rates accordingly, it would crash asset prices long before it impacted the real economy, which is why they will not do it. Higher levels of inflation, are, therefore, here for several years yet. Workers, and their unions should prepare accordingly. We need, co-ordinated strikes for higher wages, and not the episodic one and two day protests seen so far, but a permanent stoppage until claims are won. We need a TUC demand, backed by the threat of a General Strike for a much higher Minimum Weekly Wage, and for higher pensions and benefits to go with it. We need a sliding scale of wages, pensions and benefits, so that all of these rise each month in line with a workers cost of living index calculated by local workers committees, and labour movement economists.
We also need the TUC along with the ETUC to demand that workers across Europe not be sacrificed on the altar of NATO imperialism, either from war or from the effects of sanctions. They should demand an end to those sanctions on Russia and China, and in particular, the opening of Nordstream2 so that, Europe can obtain the cheap gas it requires to survive the Winter.
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