Predictions For 2023 - Prediction 1 Inflation Does Not Go Away

Prediction 1 – Inflation Does Not Go Away

Many central banks are predicting that inflation falls significantly in 2023, such that, by 2024, it will be back down to their target 2% levels, with some, even, predicting deflation at the end of that process. These are, of course, the same central banks that, in 2021, claimed that inflation was merely “transitory”, and repeatedly underestimated the level it was going to reach. Given all of my writing on inflation over the last couple of years, setting out the Marxist analysis of it as a monetary phenomenon, it should be obvious why I think these claims are going to be proved wrong.

There are three reasons why the prices of commodities might rise. Firstly, the value of the commodity itself rises, i.e. it requires more social labour-time for its production than before. Secondly, the value of the standard of prices falls, i.e. it represents less social labour-time than it did before – inflation. Thirdly, there may be fluctuations in the demand and supply for commodities, so that, at one point prices rise, and at others they fall. In the last two years, all of these have played into rising prices, but, it is only the second that causes inflation, and leads to a permanent rise in prices.

In general, social productivity rises, and so the social labour-time required for the production of every commodity, and all commodities, progressively falls, such that, if the standard of prices remained constant, the general price level, and the prices of every commodity would fall. But, at times, the level of productivity in certain areas of production, may fall. For example, a crop failure reduces productivity in agricultural production, and that feeds through into other areas of production where agricultural products constitute a sizeable element of constant capital – raw material. That tends not to be so significant in a global economy, because a crop failure in one part of the world can be compensated by importing products from another. But NATO's economic war against Russia, has prevented Russian grain and other exports from being shipped, as well as Russia's retaliation to that, by blocking Ukrainian grain exports has meant that large amounts of grain have been taken off the world market. Russia is the world's largest grain exporter by far, with Ukraine being the fifth.

In addition to global grain supply being drastically reduced, amounting to a massive drop in social productivity, the same NATO sanctions against Russia, reduced its exports of oil and gas, again amounting to a significant drop in social productivity, in relation to energy production. The use of gas in the production of fertiliser, along with similar sanctions on Russian exports of fertiliser, added to this huge drop in global social productivity for both energy and agricultural products, raisin the global value of energy and food, which has fed through into higher energy and food prices. But, other such measures have lowered global social productivity for all commodities. US trade sanctions against China, particularly in respect of technology, is just one part, but the US has also imposed trade restrictions on the EU too, leading to retaliatory actions.

Global lockdowns massively increased frictions and costs, undoing a lot of the rise in global social productivity that globalisation had brought, and those restrictions have still not been completely lifted, particularly in China, which is the workshop of the world. But, increasing protectionism, of which the US economic war against China and Russia is just part, forms part of a longer-term increase in such frictions and costs that reduce global social productivity and increases the value of commodities, reversing a trend that had been in place for 40 years. Brexit is just another manifestation of it.

This is a consequence of the unfolding of contradictions within imperialism as the stage of capitalism where it becomes a world economy, but has not created a single world market and state, and, consequently, where different competing large states seek to assert their dominance against others. It is also a consequence of the contradiction between the interests of large-scale socialised capital within each state, as against the interests of the petty-bourgeoisie, as manifest in Brexit, and assorted reactionary populist movements across the globe. It is a repetition, on a larger scale, of the same phenomenon that led to the creation of nation states, and then to the need to enlarge and centralise them, as with the US Civil War, and the European Wars of the late 19th and early 20th centuries.

At the same time, the petty-bourgeoisie, threatened by such developments, responds to it, within each state, and seeks to turn the clock backwards, as with Brexit. On the one hand, such restrictions are clearly not in the interests of global, large-scale socialised capital, whose vehicle is the multinational corporation, footloose and free to base itself wherever provides the greatest benefit, nor the global ruling class sharing the same characteristics, and which, now, owns all its wealth in the form of fictitious capital, equally footloose and able to be shifted from one country to another at the press of a computer key.

The driver of those frictions remains a state bureaucracy whose immediate interests are intimately tied to the preservation of existing state structures, as well as the political role of the petty-bourgeoisie, and the reactionary nationalist parties tied to it. Those contradictions can be seen to still play out inside the EU itself, delaying its rapid development into a centralised state. Even more so do they, thereby, play out on a global stage between large states such as the US, EU, and China. Overall, however, the long-term rise in global social productivity is going to assert itself, as The Law of Value.

As far as the second alternative is concerned, every standard of price has suffered continual and significant devaluation for the last 40 years. On the one hand, it counterbalanced a huge rise in global social productivity brought about in the 1980's and 90's, so that what would have appeared as a huge fall in the prices of manufactured commodities – and primary products using large amounts of fixed capital for their production – was largely disguised as a result of this inflation. A large amount of the liquidity also fed into the massive inflation of asset prices, such as the 1300% rise in the Dow Jones between 1980 and 2000.

After 2020, a further massive increase in liquidity occurred, and this time it was channelled, not solely into pushing asset prices higher (they rose again massively in 2020 and 2021), but directly into households, as income replacement, and so fed into consumption, and commodity prices, particularly having been welled up, during the lockdowns, and then suddenly released when those lockdowns ended. The increase in liquidity/devaluation of the standard of prices causes an inflation of prices that is permanent, and has not ended yet. But, in the given conditions, of restricted supply due to lockdowns, and then a sudden increase in monetary demand, it also fed into the third alternative of temporary imbalances of supply and demand, both at an individual and aggregate level.

That third alternative cause of rising prices, means that, as production gets underway again, as lockdowns end, supply will increase, so easing the imbalance of demand over supply. Increasing supply of microchips already seems to be feeding into car production, enabling it to rise, and so meet demand, which has also fed into a sharp fall in used car prices that had soared during lockdowns due to the unavailability of new cars. At the same time, however, this increase in production, means that more workers are employed, earning additional wages, and further tightening already tight labour markets, putting further upward pressure on wages. Rolls Royce in Goodwood have already handed a pay rise to their workers amounting to up to 17.6%. The risk of losing workers to competitors itself causes employers to cough up, with the average pay increase for workers shifting jobs being 15%.

But, those higher wages also feed into higher demand for consumption goods, which is yet to feed through into a new wave of demand. The demand for consumption goods means an increased demand also for raw materials, energy, and equipment. That is also coming at a time when the Chinese Stalinists have been forced to abandon their own attempts at locking down the Chinese economy, to prevent it growing rapidly, pushing Chinese wages higher, interest rates higher and its own asset price bubbles to burst. The next few months will see a surge of economic activity in China, and feeding through into neighbouring parts of Asia. So increased supply will also lead to another wave of increased demand. Increased Chinese demand for energy and raw materials is likely to cause a spike in primary product prices, with Goldman Sachs predicting a 40% rise in such prices, including energy in 2023.

Chinese demand for oil and gas will explode NATO and the EU's attempt to impose a price cap on Russian oil and gas. The first consequence of that will simply be for Russia to withhold supplies, and, then, to shift more of its exports to China and India, as Asian economies grow more rapidly, led by China in coming months. That also comes at a time when the US and other countries will be trying to restock strategic oil reserves run down to try to depress oil prices, as part of the economic war against Russia. Having sold those stocks at around $75-80, they will have to buy them back at between $100-120. Similarly, EU gas supplies will be rapidly being used up, as cold weather hits Northern Europe, and as it comes to restock, will face much higher global gas prices once more.

As I wrote a while ago, if central banks really did want to reduce inflation, they are using the wrong tools. Higher nominal policy rates will not reduce inflation, and they will not even slow economic activity, at current real rates after inflation. Even if they were raised enough to slow the economy, without reducing the liquidity in the system – notes and coins, credit and so on – and so stopping the devaluation of the standard of prices, the result would not be a drop in inflation, but simply stagflation. But, as wages rise, and feed back into consumer demand, the economy will not slow, and the global economy, particularly, will not slow, as China comes out of lockdowns, because that demand will feed into the European, Pacific, North and South American and African economies too. Indeed, that forms part of my second prediction for 2023, which is that there will be no global recession.

In reality, as the costs of primary products rise, and wages continue to rise, squeezing profits, central banks will be forced to continue to inject additional liquidity to enable firms to compensate for these higher costs in higher prices. The inflation that has occurred means a permanent rise in prices, but a further permanent rise in prices requires further injections of liquidity, which only become manifest after a two year lag. So far, the measures of QT introduced by the Federal Reserve, Bank of England and others have been tiny compared to the liquidity injected. Meanwhile, liquidity from other sources, such as commercial credit, and bank credit has increased. Central banks are already under pressure from speculators to “pivot”, i.e. to stop the policy of currency tightening and to again relax it, because what the rate rises have achieved is to cause asset prices to tumble by between 20-40%.

They should not expect, any pivot on those policy rates in the next year, but central banks will facilitate further inflation at current levels by injecting liquidity to enable firms to raise prices and defend profit margins.

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