United States
Whilst the annual figure for the US came in at 6.5% for headline, and 5.7% for core CPI, the month over month figures were a fall of 0.1% on headline, as against a 0.1% rise the previous month. For core CPI, the figure was a rise of 0.09 points, as against a rise of only 0.06 points the previous month. Services account for 80% of the economy, and also, currently, represent the fastest growing part of the economy, as it continues to come out of lockdowns, and spending shifts from goods that consumers could not buy, into all those areas of services, such as entertainment and leisure. In that sphere, rather than inflation falling, it continues to rise, with a rise from 7.22% to 7.52%.
A major contributor to the fall in US headline inflation has been the fall in energy prices. It fell from 13.1% to 7.3% last month. That had several causes. Firstly, Biden used the US Strategic Petroleum Reserve, and pressed other NATO states to do the same, with their reserves, to increase supply, and push down prices. For Biden a large part of that was to push down US petrol prices that had been pushed up, as a result of NATO's boycott of Russian oil, and which threatened Democrats' election prospects in the midterm elections. A second reason was to try to put pressure on Russia, which has gained massively from those high global energy prices, during 2022, which boosted its coffers, and led to a sharp appreciation of the Rouble. The SPR is now depleted to dangerously low levels, and needs to be restocked, now, at already higher prices.
Another reason was mild weather in the Northern hemisphere, during late Autumn, at a time when the EU had built up its stocks of oil and gas. But, the Winter has only just started in the Northern hemisphere (21st December 2022 - 20th March 2023), and the coldest months, when, also, the most snow and ice arises are in January and, particularly, February. The recent weather bomb in the US, shows the potential for much more severe cold weather to affect those calculations, as we move deeper into Winter.
Finally, the repeated lockdowns in China, which had intensified again, over recent months, meant that its economy was slowed, and so its demand for energy. But, those lockdowns, as I had predicted, could not be sustained, and China has now more or less fully reopened with its economy starting, once again, to grow rapidly, and along with it, its demand for energy. Already oil prices have surged, with estimates of it rising to $120 per barrel in the near future. As those states that denuded their strategic reserves now also need to rebuild them, at these higher prices, that will add further to demand, pushing prices higher, quickly.
Oil prices are clearly important, because, they pass through into all other prices. Oil is used for the production of vast ranges of other commodities, not just plastics, but also fertiliser and pharmaceuticals – one reason that demands to “Just Stop Oil”, are ridiculous and reactionary – but, is also required to fuel ships, planes, trains, trucks and so on, required to transport goods across the globe, and contributing to their price. As oil prices rise sharply, again, that will pass through into all those other prices. Nor, is it just for goods prices that that applies, because all service industry also relies upon large amounts of both fixed capital, and materials, all of which are goods that must be produced, and shipped across the globe. In addition, it feeds into the costs of the workers in those service industries, raising the value of their labour-power, and, whilst its true that higher wages do not cause inflation, the reality is, also, that central banks always increase liquidity when wages are rising so that the rising wages do not lead to a sharp squeeze on profits, and that increased liquidity is what leads to higher inflation.
China's reopening also means a surge in demand for other primary products, and consequent spikes in those prices. Its predicted that primary product prices, for things like copper, will rise 40% in the coming year. Copper prices have risen by 7% in the last 5 days, 11% over the month, and 23% over the last 3 months, showing that the rise in its price is accelerating. A similar thing can be seen with iron ore prices, which have risen from $80 per ton, in November, to around $120 today. Movements in these prices depend a lot on supply and demand, which needs to be taken into consideration, with alternate periods of excess supply and inadequate supply. In the longer-term, supply increases to meet the higher level of demand, but that can take months, and even years to accomplish, and the fact remains that with huge amounts of excess liquidity in the global economy, even with longer-term falling values of primary products, prices are raised, and those higher prices feed into the prices of other goods and services.
Higher prices of raw and auxiliary materials (circulating constant capital) do not squeeze profits, as, unlike wages, they form part of the value of the commodity. The other part of the value of the commodity is not wages, but the new value created by labour. But, as Marx sets out, in Capital III, Chapter 6, if the price of these materials rise sharply, it may not be possible to pass all of this increase on into final prices, without causing demand to fall. In that case, firms have to absorb some of the cost out of surplus value/profit, so, then, profits are squeezed as a result.
Already, as I have set out in previous posts, earlier rises in the prices of constant capital, have led to a tie-up of capital, which is what is manifest in the slow down and even falls in GDP, rather than any actual slow down or fall in output, or new value creation, as the continued strong rises in employment show. Firms do not employ additional labour to produce less! But, as well as causing a tie-up of capital, they also lead to a fall in the rate of profit as c rises, causing s/(c + v) to fall. So, to enable firms to avoid rising material costs squeezing profits, central banks will again ensure excess liquidity so as to enable generally rising prices – inflation, meaning it does not go away any time soon.
For months, the representatives of the ruling class speculators have been claiming that economies were already in, or about to go into, recession, and they were joined by the IMF, which claimed a third of the world would be in recession in 2023. But, as I have set out for months, that was never likely, despite the fact that central banks have tried to slow economic growth with rising rates, and states have caused energy prices to rise, via their boycott of Russian oil and gas, cutting into disposable income. It was more a triumph of hope over reality, as the speculators, and their representatives, actually desired a recession, causing unemployment to rise, so that it would put downward pressure on wages, and reduce, also, the demand for money-capital, so that interest rates would stop rising, enabling asset prices to stop falling. It was symbolised by the call of Larry Summers for US unemployment to rise by 50%, to over 5%, throwing millions of workers on to the dole.
But, instead of US unemployment rising, it has continued to fall, and the US has continued to create hundreds of thousands more jobs each month. In most months, it has created more jobs, often substantially more jobs, than the pundits had predicted, or hoped for. Last month it created 223,000 new jobs, as against estimates of just 200,000. Its economy needs only to create an average 90,000 jobs per month, to account for the increase in the workforce. Similarly, last week's data showed only 205,000 initial jobless claims, as against expectations of 215,000. Job Openings were at 10.5 million, as against expectations of just 10 million, meaning that the number of available jobs to unemployed workers remains very high at around 2:1. The number of unemployed, itself fell from 6 million to 5.7 million.
Its true that average hourly earnings, even in these conditions, have not kept pace with inflation. In the last year, they rose by just 4.6%. However, a look at wages themselves, shows that they rose by 6.17% over the last year – and wages for the lowest paid workers have been rising at over 7% a year, and the lowest wage that workers are prepared to accept when moving to a new job has also hit a record of $73,667, as against $72,873 the previous month.. Its most notably amongst younger workers that this increase is being driven. The average pay increase for workers moving jobs is 15%. Workers wages depend on more than just the hourly rate. They depend on the number of hours worked, payment of overtime and overtime rates, bonuses and so on.
When firms need more labour, their first recourse is to employ their existing workers for longer hours, a fact that was seen by the extensive hours that US dockworkers, in California were putting in to clear the ports, last year. As Marx points out, in Theories of Surplus Value, the cycle goes something like this. Firms need more labour, and so extend the working day, and, in conditions of surplus labour, do so without increasing pay, thereby, raising absolute surplus value, and rate of surplus value; then they have to pay at normal rates for the additional hours, so increasing absolute surplus value, but leaving the rate of surplus value unchanged; then they have to pay overtime rates for the additional hours, still increasing absolute surplus value, but the rate of surplus value now falling; finally, they can't expand the individual working-day further, and, as labour becomes scarce, workers even refuse to work overtime, reducing absolute surplus value, and hourly wage rates rise, reducing relative surplus value, and causing a sharper squeeze on the rate of surplus value.
We are a way from that last condition, which arose in the 1960's, and ran through into the 1970's, but when the unemployment rate was at about a quarter of what it is, today, measured on the same basis. But, one reason it progresses in this way, is that disposable/discretionary income for workers is a function of household income, not hourly wage rates. In the 1950's, it was the fact that women entered the workforce in large numbers, as well as male workers working large amounts of overtime that led to a significant increase in disposable/discretionary income, not rises in average hourly wage rates. In the US, the average number of hours worked per week, over the last ten years, has been around 34.4, but following the lockdowns, in 2021, it rose to around 35, and is now subsiding back to the previous level. But, there are 5 million more people employed in the US, today, than there were in 2018. Compared to the period of lockdowns, there are 30 million more people employed, or an increase of around 25%!
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| The graph shows the secular rise, since 1948, in total hours worked, and so of new value created by labour in the US. which resolves, into wages, profits, interest, rent and taxes, forming the basis of demand for personal consumption, and capital accumulation. |
Given a 20-25% increase in the number of people employed, each of whom feed additional income into their households, and so contribute to disposable/discretionary income for the household, whether average hourly wages keep pace with inflation, or not, becomes irrelevant, in terms of households spending on wage goods, and that continued increase in demand, means that firms have to continue to respond to it, by employing more workers, particularly, in labour intensive service industries, and to accumulate additional, particularly circulating, capital. Workers may not be at the point they were in the 1960's, when labour scarcity enabled them to raise wages more than prices, and to squeeze profits, but they are certainly at a point, whereby, they are not going to allow their wages to fall behind prices for long, and that is manifest in the hundreds of millions of workers, across the globe, engaged in strike action for those higher wages.
And, we are seeing that capitalist regimes that were enabled to become more Bonapartist and authoritarian, as a result of the complicity of labour movements and the Left, during lockdowns, are now using those same means to try to prevent workers from gaining those higher wages. Whether it is Biden imposing a pay cut on rail workers in the US, by law, or the Tories new anti-union laws in Britain, with no resistance from a reactionary, nationalist Blue Labour Party, the intention is the same. But, in fact, that simply is the counterpoint to the fact that labour is on the rise, and the conditions have shifted in its favour. If workers were not, now, able to demand higher wages, as firms scrabble to buy their labour-power, and if they were not confident enough in their strength to be joining unions in large numbers, and taking industrial action, mostly against intransigent state employers, those states would not need to be using such Bonapartist methods to resist them.
And, despite all of the claims of imminent recession, the US economy grew at an annualised rate of 3.2% compared to the previous, quarter. Rather than slowing, even measured by GDP, the US economy has speeded up. That was before, the effects of China reopening are felt on global growth. Indeed, such are the facts about actual economic growth, across the globe, that many of the financial institutions that, even before Christmas, were forecasting recession, are now changing their positions. With the demand for labour remaining strong, household incomes rising, economic activity continuing to expand, and now supplemented by the effects of China reopening, the speculators dreams of a recession, and falling wages and interest rates are forlorn. And, with all of that pressing on profit margins – even as total profits expand – central banks will inevitably keep liquidity plentiful to enable rising prices, in addition to automatically expanding liquidity from the growth of commercial credit.
Looking at the other measures of inflation referred to in previous posts, the CPI trimmed mean fell, on a year on year basis, from 6.66% to 6.54%, but, on a month on month basis, it actually rose. The CPI Median figure fell, but only from 6.98 to 6.93%, hardly suggesting that core inflation is going to fall significantly any time soon.
Looking at the Atlanta Fed's index of sticky prices, i.e. those that do not move one way or the other easily, they also rose on a year on year basis, now reaching nearly 7%. Its true that, on the basis of a three month moving average, as indicated in the chart, they have moved down sharply, but the chart also shows similar previous downward moves, in the average, without it being sustained.
Looking inside these movements in prices of individual commodities, large movements can have significant, but not necessarily longer-term effects. For example, chip shortages, and lockdown frictions led to new cars not being available that drove huge rises in used car prices. Now chips are becoming available, and lockdown frictions are disappearing. New cars become available, and, consequently, used car prices have actually fallen substantially, but that will not continue.
Similarly, as interest rates have risen, and mortgage rates have followed, house prices have started to fall noticeably. In the US, a figure known as owners equivalent rent is used for housing costs. Home owners are asked how much their house would rent for. With falling house prices, that figure necessarily falls. Yet, new rents for tenants are still rising, as falling property prices have not yet fed through into lower rents. As property prices fall, rents undoubtedly will follow, but falling property prices, and rentals is the inevitable consequence of the fact that for forty years, excess liquidity was pumped into inflating such asset prices, and now that process is reversing. A sizeable fall in house prices will feed into yet further household disposable income, and that will go into increased demand for all of those wage goods workers require, and whose prices are now rising.
The US had another advantage in 2022 that has disappeared. For most of the year, the Dollar appreciated against other currencies, as the Federal Reserve raised its rates faster than other central banks. The Dollar rose by around 20% compared to other currencies other than the Rouble, and that meant that the US Dollar price of imports was lower than it otherwise would have been, and with a consequent effect on other US prices. But, in the last few months, the Dollar has been falling. The Euro had fallen to just $0.95, but has now risen to $1.08, whilst the Pound fell to just $1.03 briefly during Truss's premiership, but has now risen to $1.22. The Yen had continued to fall, as the BoJ continued to try to implement yield curve control, by ever larger amounts of liquidity pumped into JGB's, but as its abandoning that strategy, the Yen has risen from 150 to 127 to the Dollar. Now, as China reopens, the Yuan has also risen from 7.2 to 6.7 to the Dollar.
As the Federal Reserve looks to slow the pace of rate hikes, at the same time that the ECB, Bank of England, BoJ and others increase theirs, the Dollar looks set to weaken further, with a consequent effect on rising US import prices, and its domestic prices.
I will examine, the UK and EU on Friday.
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