The Latest US Inflation Data

The latest US inflation data showed it falling on both the reading of its headline and core rates, by more than had been predicted. Bond markets surged, causing yields to fall sharply, and equity markets soared. That in itself poses problems for the Federal Reserve, at a time it is supposedly trying to tighten monetary policy, because it eases liquidity conditions in financial markets. Its worth remembering that a fall in inflation does not mean prices are falling (though some, like used car prices, may), only that, overall, in the basket of goods and services measured, they are not rising so fast. But, the data also poses other problems for the Federal Reserve, the State, and bourgeois economic theory.

The argument presented by bourgeois economists, like Larry Summers, is that inflation is a consequence of an imbalance between aggregate demand and aggregate supply, and not, as Marx explained, a monetary phenomena caused by excess liquidity – printing too many money tokens, or increasing credit. So, the solution put by bourgeois economists is to send the economy into recession, so that demand is reduced, which really means creating unemployment so that workers accept lower wages, because what they really mean is that workers wages are too high, causing them to increase their demand for wage goods, and also causing firms costs to rise. Larry Summers has been open about this line of argument, saying that US unemployment would have to rise by around 50% from its current 3.5% level to over 5%, for more than a year, to reduce inflation.

Well, the latest data trashes that notion, because the US is not in recession, the labour market remains very strong, and yet, the rate of inflation appears to have taken a marked step backwards. On the same day that the inflation data was released, weekly initial jobless claims data was released, showing new claims of 225,000. That was higher than the predicted 220,000, and the previous week's 217,000, but it is way below the 260,000 figure seen back in July, and less than half the kind of figure of around 500,000 that is normal for periods when the US is in, or entering, recession. It followed last month's non-farm payrolls report also showing that the US had created 261,000 new jobs last month (about three times what is required to cover the average 90,000 new workers per month), as well as last month's data for job openings showing a further increase. So, the argument that, to reduce inflation, its necessary to increase unemployment has been shown to be baloney. That was already obvious, of course, from the fact that, over the last year or so, inflation was rising even when employment levels were much lower, and during which time hourly wages have lagged inflation.

The ruling class do, however, need to increase unemployment, and slow the economy for other reasons. Its not to slow inflation that they need to increase unemployment, but to try to discipline labour, and slow wages growth, so as to protect profits that get squeezed when wages rise. Its not to slow inflation they need to reduce wages, and slow economic growth, but to prevent those rising wages and consequent economic growth causing firms to use profits to expand, rather than paying out the profits as interest/dividends, or to buy back shares to inflate their prices. Rising demand, means that competition forces firms to expand for fear of losing market share, and, in conditions of rising wages, and a squeeze on profits, to finance that expansion, they have to retain more of the profit, and issue more shares and bonds, which reduces the prices of those shares and bonds, which, in turn, leads to less flattered figures for earnings per share, and so on, so that the multiples of p/e ratios are seen to be way too high, leading to further selling of assets.

That is why central banks have been raising their interest rates, rather than focussing on increased QT, and its why the Brexitories are now so keen to implement a new round of fiscal austerity to slow the economy. In conditions, however, where millions of workers are now lined up to defend their living standards, the Brexitories are going to struggle to push through their agenda, especially with a fatally wounded and divided Brexitory Party. Its not only that they are going to have to concede inflation busting pay rises for workers in the state and near state sector, but even as they try to shut down areas of state provision, it will fail to have the desired effect. Firstly, huge swathes of the state sector cannot be cut further without ending provision altogether, but, in current conditions, where that provision is vital, non-state providers will fill the gap, seeing new profit making opportunities, even though, often, paying workers higher wages to recruit them, and workers using this new non-state provision will simply demand higher wages to cover the cost of it. That is only a problem if you fetishise provision by the capitalist state.

There is no reason why many of these services have to be provided by the capitalist state, which itself tends to be extremely bureaucratic, inefficient and so costly in its provision. In Europe, there are centralised single payer social insurance schemes for health and social care, but the actual provision comes from non-state, often mutual, providers, and is far more efficient, and of higher standard than the NHS and social care in Britain, for example. Moreover, there are far more vital things even than health care that no one thinks twice about, which are not in the realm of the capitalist state. Food is vital, but food production and distribution is in the hands of non state enterprises. Its not fetishising control by the capitalist state (itself our immediate class enemy) that workers should focus on, but gaining our own democratic control over all of the socialised capital (state and non-state) involved in all these spheres.

So, closing down state provision of many of these things will not have the desired effect, in current conditions, because alternative providers will step in to fill the demand, themselves, then, employing workers. This is not the 1980's or 1990's. That is why the Brexitories are so intent on focussing on holding down state sector wages, and would, if they could (they can't because of internal divisions), cut pensions and benefits. And, the Brexitories own agenda of Brexit has also screwed them on that, because it has caused frictions and rigidity in the economy, and the labour market, in particular, raising costs, and making labour scarce. Hence the Brexitory Chairman of Next complaining that they need to increase immigration. That's not the result that all the racists that supported Brexit intended, but, in any case, a vain hope, because why would any skilled workers want to come to Britain on visas that give them no rights or safeguards, when they can go to fill jobs in the EU instead?

But, in the US, many of these state provided services, in Britain, are already provided by non-state enterprises, anyway. And, far from implementing austerity, the US is in the process of a sizeable fiscal expansion, although the Republicans will no doubt, again, try to derail it, even with slim majorities in the House, and possibly the Senate. The problem for the Federal Reserve is that, if the inflation rate actually has peaked, and its not clear that it has, yet, it will be under pressure to end its tightening cycle of rate rises. Its the prospect of that, or even a slow down in those rises, that caused bond and equity markets to surge, on Thursday, and also caused the Dollar to drop sharply. But, that is another example of buy on the rumour sell on the fact, seen recently in relation to the suggestion that China was going to drop its Covid-zero policy nonsense.

The reality is that real, market rates of interest are not a consequence of inflation, but of the relation of demand for and supply of money-capital. If inflation slows, and the Federal Reserve ends its rises in its policy rates, the US economy will continue to grow strongly, and the demand for labour along with it, causing wages to rise, and profits to be squeezed. Rising wages feed into yet further rising demand for wage goods, and even for some goods and services that previously workers could not afford to buy. In fact, falling inflation will accelerate that, because mobilised workers, as well as just the momentum now established for rising wages, will then have increased disposable income, causing a more rapid expansion of consumer demand.

Firms are forced by competition to accumulate capital to meet this rising demand. For many goods and services, as Marx describes in Theories of Surplus Value, Chapter 21, this accumulation of capital amounts to an accumulation of circulating capital, which takes the form of an increase in coexisting labour. It is financed out of commercial credit, rather than additional borrowing or realised profits. But, some requires additional fixed capital, which does require financing from profits or borrowing, and that means rising real market rates of interest. In either case, rising wages, as employment grows, means squeezed profits and an increased demand for money capital relative to its supply, resulting in rising interest rates, and a fall in asset prices.

In other words, firms either use some retained profit to finance the expansion, throwing less into the money markets, or into the pockets of shareholders as dividends, or else they issue more shares and bonds to raise the money, the increased supply causing their prices to fall, or else, they borrow from banks and other financial institutions, again raising the demand for money-capital, and causing interest rates to rise. These rising rates of interest cause all asset prices to fall, due to the process of capitalisation.

Bourgeois economists fail to understand this, because they see the rate of interest as the price of money (a meaningless concept) rather than the price of money-capital, and they confuse money with money tokens, believing that the supply of money, can be increased by printing more money tokens, and so, its price (rate of interest) reduced. The contradiction of the latter is shown by the fact that printing additional money tokens causes inflation, and yet they, also, believe that, at least central bank, interest rates rise or fall according to the rate of inflation. To overcome that contradiction, their theory posits inflation as being caused, not by the devaluation of the measure of value (standard of prices), but by the imbalance of aggregate demand and supply, essentially rising wages.

But, its not clear that the latest US data actually does indicate that inflation has peaked. As I have set out before, inflationary periods are usually characterised by several waves, not by a progressive rise followed by a corresponding fall. Nor do the various indices actually measure inflation itself, but only the changes in prices of various selected baskets of goods and services. So, as I pointed out at the time, the data during lockdowns was highly misleading, because the prices of all those goods and services that consumers were not able to buy, but which were prominent in the various baskets measured, fell significantly, whilst the prices of all those goods and services they actually were buying, rose sharply. Its also well known that all such indices underweight those goods and services that workers tend to buy.

The data is still reflecting the fact of changing consumption patterns of the large increase in “inside” spending now being replaced by “outside” spending, as people reduce purchases of new TV's, and so on, and begin to spend more money on entertainment, and so on. Similarly, used car prices rose significantly over the last year or so, because lockdowns and other frictions meant that computer chips for new cars were not available, and consumers unable to buy new cars, significantly increased demand for a limited supply of nearly new, used cars. Now, chip supplies are becoming available, raising new car production. This is not a change in inflation, but merely in market prices resulting from changes in demand and supply, in this specific sphere.

Another similar example is energy prices. Over recent months, oil prices rose as NATO sanctions against Russia, reduced global supplies. Increased oil prices fed through into higher US gasoline prices, threatening the chances of Biden's Democrats, so Biden tapped the Strategic Oil Reserve to reduce US gasoline prices. However, the SPR is now at very low levels, and needs to be replenished. Pushing out oil from the US and other strategic reserves, combined with the slowdown in China caused by its zero-Covid lockdowns, had resulted in oil prices falling. However, the need to replenish reserves combined with reductions in supply from OPEC+, together with rumours of an end of China's zero-Covid madness, has led to global oil prices rising again, towards and beyond $100 a barrel. Strategic reserves are likely to be replenished at much higher prices than those prevailing over recent months, and that will pass through into current prices for fuel and heating oil.

Another example is gas. In recent months, the EU, again in response to NATO's sanctions against Russian gas supplies, has attempted to build up its stocks, in readiness for the Winter. It did so at very, very high prices, because those same sanctions, had blocked supplies of cheap Russian gas via Nordstream. EU storage facilities are now more or less 100% full. That does not mean that the EU has sufficient gas to last through the Winter, because, although the EU has much better storage facilities than, say, Britain, which relied on the natural storage of the gas in the North Sea, it cannot store enough gas to provide for supply over the Winter, only to supplement the gas it needs to buy during the Winter months.

In recent weeks, with storage capacity full, it has stopped buying, reducing demand, with a consequent fall in global gas prices. However, the gas it will supply to consumers in coming months, has been bought at those previous high prices, and as that supply in storage is used up, it will still need to buy in additional supply, especially if there is a severe Winter. The infrastructure does not exist to buy in large amounts of LNG, for example, to replace Russian gas, and so, in coming months, as additional supplies must be bought, gas prices are likely to rise, yet again, and as a global commodity that will affect US gas prices too.

These energy prices feed into the costs of all other goods and services, and so this is part of another wave of inflation that may unfold in coming months. Any opening of the Chinese economy is likely to have further effects on raising the prices of energy, food and other primary products. Moreover, we are yet to see the second round effects of rising wages. Higher wages do not case inflation, but they do, as described lead to a squeeze on profits, and, to protect those profits, central banks increase liquidity so that firms can pass on the higher costs in their prices.

The strong labour market in the US means that wages will continue to rise as firms have to compete against each other for available supplies. Even in Britain and the EU, where the economic war against Russia, and damage done to the economy by inflicting high energy prices on itself, means that economic growth has been slowed, that remains the case. The latest UK GDP data showed only a 0.2% fall in the latest quarter, most of that caused by a 0.6% drop in September, accounted for entirely by the additional Bank Holidays for the Queen's funeral etc.

The chart for US Headline Inflation seems to indicate a peak, but its not at all clear that the same is true for the Core CPI, as there have been similar previous dips. 

The Core rate is more significant than the headline rate, because it gives an indication of how persistent the inflation is likely to be, rather than being affected by big changes in particular prices that may reverse or not recur. On the other hand, core rates can exclude those important things that consumers have to buy, and so changes in whose price have significant effects. Looking at the other measures of core inflation that the Fed used, in the past, to justify its claim that inflation was only transitory, this is even clearer. 

The Cleveland Fed's chart of the trimmed mean shows a dip, but it is tiny compared to the huge rise that preceded it, whilst the index of sticky prices produced by the Atlanta Fed, indicating the change in price of all those goods and services, whose prices are least affected by seasonal or temporary factors, showed no change at all. We have only month of data showing any indication that inflation has peaked, following month after month for the last year or so in which inflation has continued to exceed expectations. Time and again speculators have seized on any news or rumour to hope for the best for asset prices, which usually also means the worst for the real economy and for workers. This could be just another such instance.