Across the globe, as I predicted at Christmas, inflation remains high. Again, as predicted, there is no sign of the recession that the speculators and catastrophists have clamoured for. Real wages have fallen, as pay increases have usually failed to match price rises, but not by as much as the speculators and catastrophists were predicting, as labour shortages made up for the weak-kneed response of union bureaucrats, and consequently the rate of surplus value, and rate of profit rose. But, that continued economic growth – not reflected in GDP – meant more labour employed, more new value and surplus value produced, so that total wages to households rose, facilitating continued and strengthening demand for wage goods, at the same time that, even without the rise in the rate of surplus value, total surplus value/profit also rose.
Last week, US headline inflation came in at 4%, down from 4.9%, the previous month, and down from 9.1% in June last year. That is significant progress but still leaves US headline inflation at double the Fed's target of 2%. Moreover, this figure is not really a good index of what is really going on. Inflation is a monetary phenomena, resulting from excess liquidity in the economy, as Marx describes in A Contribution To The Critique of Political Economy, and elsewhere. Money, and later the standard of prices, acts as an indirect measure of the value of commodities. However, when it comes to the price of any individual commodity, it may move up or down, not only because of changes in the value of the standard of prices, but also because of changes in its own value, or simply because of changes in the current level of demand and supply.
Inflation indices, produced by states, measure changes in the market prices of a range of goods and services, prices which change for these variety of reasons. Some goods and services may see a sharp rise in their market price, if demand for them rises, but supply is unable to respond quickly to that demand. That was seen as lockdowns were lifted. Similarly, market prices for some commodities may rise, because the supply of them is reduced, or the cost of supply, at the same level, rises. That is what happened when NATO and its allies introduced their boycott of Russian oil, gas and food supplies, reducing global supplies of all those commodities, and raising the costs of that supply. These are not measures of, or indications of inflation, but merely changes in the value/cost of production, or market price of individual goods and services.
The headline rate of “inflation”, therefore, is not actually a measure of inflation, but of the changes in the market prices of these selected baskets of goods and services. Different baskets produce different figures, just as the manifestation of actual inflation, can result in huge rises in asset prices – shares, bonds, property – alongside, modest rises, or even falls in the prices of goods and services. That has significant consequences. Over the last 40 years, if you were thinking of buying a house, for example, and saw house prices rising by 20% a year, or more, that gave you a strong incentive to buy a house as soon as possible, even if mortgage rates were high. With mortgage rates, during much of that period, falling, and getting close to zero, that gave an even greater incentive to do so, which is why that spiral of demand for property, as well as other assets whose prices were rising, was set in place.
During that period, talking to someone about the headline rate of inflation of 2%, if they were thinking of buying a house, was pretty irrelevant. The “inflation” they were interested in was this inflation of property prices, and, if they were looking to the need to provide for a pension and so on, the similar rapid inflation of the prices of shares, bonds and so on. If you had $1,000, in 1980, to spend buying US shares, that $1,000 was worth 13 times more in 1980 than it was worth in 2000, i.e. in 2000, it would buy you only a thirteenth of the number of shares it bought in 1980.
Today, that situation is reversed, which is why those lured into that Ponzi Scheme of ever inflating property and asset prices are feeling betrayed, and screaming about it, as are the speculators, and the conservative social-democrats, who built their entire world view on the idea that, instead of growing the real economy, and producing new value and surplus value, it was simply possible to get rich by inflating asset prices, producing capital gains, which could, then, be turned into revenue. In other words, asset stripping, the equivalent of the farmer that consumes his seed corn, rather than planting it, to produce more corn.
Today, we have the prices of consumer goods and services rising rapidly, and nominal interest rates rising – though in most cases they remain below the level of inflation – whilst the one set of prices that are not rising, and in many cases falling, is asset prices. In the UK, house prices are forecast to fall by around 30%. So, again, the headline rate of inflation is pretty meaningless if what you are actually interested in, currently, is the price of houses. If you are thinking about buying a house, the fact that your wages have risen by an average of 7%, then, puts you in a much better position to buy those cheaper houses. If you have savings in the bank, then a 30% fall in house prices, makes that money 30% more valuable than it was, whatever, happens to consumer price inflation.
If we look at US core inflation, then, this illustrates the point, because, in fact, it is now higher than the headline rate, after months of being below it, as these specific factors for individual goods and services, in the general basket moved their prices higher by larger amounts. One obvious factor, there, was the price of energy, which rose sharply even for the US, as a result of NATO's/EU's boycott of Russian oil and gas. In part, that was offset by Biden's use of the Strategic Petroleum Reserve, and those of other NATO allies. Again that gives a distorted picture, because those reserves were run down, and the other reserves built up by the EU ahead of Winter, meant that additional purchases were not required, putting downward pressure on global prices, as we now have entered the Spring and Summer. However, not only must stocks be rebuilt ready for next Winter, but also, those Strategic Reserves, must be rebuilt, having been run down to dangerously low levels. All of that at a time, when China, India and other economies are demanding more oil and gas, meaning that come the Autumn, those prices are likely to rise sharply, unless the current boycotts on Russian oil and gas are lifted.
US Core inflation, rose by 5.3% year on year, and the month on month figure rose by 0.4% the same as in the previous two months, indicating little change in core inflation in coming months. Core Inflation is little changed from the 5.9% it was at in June last year. At the same time, the US continues to produce more new jobs at a faster pace than the speculators have hoped for. Despite continual predictions by speculators and pundits that the economy was going to go into recession, and that unemployment was going to rise, as fewer newer jobs are created, the non-farm payrolls increased, last month by 339,000, significantly above the estimates, and the biggest rise since January. And, whilst the number of weekly initial jobless claims has ticked up to 256,000, on the four-week moving average, that is only half the kind of figure of around 400,000 traditionally seen during periods when the economy is going into recession. In fact, on a seasonally adjusted basis, the weekly figure actually fell.
It is labour that produces new value, and surplus value, and this increase in the amount of labour employed in the US and across the globe is the basis of the increased value and surplus value being produced, whatever the GDP figures suggest. As I have set out before, the GDP figures, measuring revenues are deceptive, because with inflation, a part of the surplus value produced is absorbed to replace the existing capital that has been consumed, i.e. a tie-up of capital. It is partially offset, because wages have not risen in line with prices. But, firms have been able to increase profit margins/rate of profit, even if, listening to some of the petty-bourgeois/small capitalists getting squeezed, that may not seem to be the case.
US profits are currently accounted for around 9% of US GDP, the highest percentage in a century.
That figure is almost double what it has been, on average, in the period between 1965-1985. It began to rise in the mid 80's, before falling in 2000, following the Tech Wreck, and 9/11, before rising again, and then dropping in 2008/9 as a result of the GFC. But, in short, it has been on an upward trend since 1985. A look at profit margins also shows a similar upward trend, but with more short-term volatility.
Again, despite the predictions of recession, therefore, the US economy saw GDP rise by 1.3% in the first quarter, and that figure was pulled lower by the increase in private inventories, which deducted 2.1 percentage points. The Federal Reserve is forecasting only 1% GDP growth for the year, meaning that it would have to drop to only around 0.5% in the second half of the year. That looks unlikely, as employment and demand continues to rise. In fact, the figure for the second half is more likely to be around 2%.
In the UK the picture is the same, but worse. Headline CPI remained at 8.7%, as in the previous month, but core inflation rose to 7.1%, from 6.8%. It confirms a rapidly rising trend since January, when it stood at 5.8%. The 7.1% figure is the highest for 31 years. Britain is suffering not only from the inflation caused by the years of excess liquidity pumped into the system to push up asset prices, and the excess liquidity pumped into circulation during lockdowns, but also from the same rising costs of energy and so on that the US suffered, as a result of the boycott of Russian oil and gas, but also from the effects of its idiotic decision to go for Brexit, massively increasing its costs of trading with its main trading partner the EU, as well as introducing huge frictions into its labour market at a time of large and growing labour shortages.
As with the US, those labour shortages are a result of continued economic growth, despite all of these frictions and additional costs imposed on the economy. As with the US, wages have not risen in line with headline prices, but average wages are rising by 7.2%, slightly ahead of the 7.1% rise in core prices. More importantly, as I have set out previously, the increase in the number of people employed, the fact that people are moving to better, higher paid jobs, means that incomes going into households are increasing at a faster pace than the individual wage data suggests. Consumer spending has, then, continued to increase, and yet, savings have also increased. Household Debt to GDP has fallen from 92.5% in February 2021, to 83.5% last month. The household savings rate which spiked to 22% during lockdowns, as households could not spend, and which dropped to 6.5% in January 2022, rose to 9.4% in January 2023, on a steadily upward trend.
Inflation globally has fallen, because central banks have attempted to reduce some of the excess liquidity they have injected into the global economy. The means of doing so is not the widely publicised rises in central bank policy rates of interest, but the introduction of QT, to reverse all of the QE undertaken. The annual rise in productivity and output, itself absorbs excess liquidity, provided it is not added to. Moreover, some of the “inflation” is actually just a result of changes in the prices of some goods and services, not actually inflation. That is why the changes in core prices have not seen the same kinds of movement, or, as in the case of UK core prices, have actually risen. The US, has been undertaking QT for many months, and it takes around 2 years for changes in liquidity to impact prices. The collapse of several US banks meant that the Federal Reserve was led to provide additional liquidity, but that seems, for now, to have subsided, though as interest rates continue to rise, its likely that other banks and financial institutions whose balance sheets are a fiction based upon grossly inflated asset prices, will also be exposed.
The same thing affected Credit Suisse, and was exposed in Britain, during the short premiership of Truss, as bond yields spiked, and pension funds were in danger of going bust. That again led to both the ECB and Bank of England, injecting additional liquidity, in opposition to its own intended policy of QT. A big factor, in the falls in “inflation” that have occurred, as stated earlier, is the fall in energy prices, as a combination of a mild Autumn and Winter, the use of stocks and reserves, led to reduced demand and lower prices over recent months. But, as also set out earlier, those stocks now need to be rebuilt, as demand rises into the Autumn and Winter, and does so whilst a growing global economy, will see rising demand. Yet, NATO/EU's boycott of Russian oil and gas is still in place, meaning that energy prices are likely to rise, unless an ever milder Winter comes to their rescue.
Those lower energy prices have meant that firms were able to sustain higher profit margins, and central banks did not need to inject additional liquidity to enable firms to raise prices. The fact that wage rises have also not kept pace with price rises, meant that profit margins were able to rise, and so reduced pressure on central banks to increase liquidity to enable firms to recover the higher cost of wages, and a consequent squeeze on profits. But, as labour shortages continue to increase, wages will inevitably rise, as firms compete for that available labour. The union bureaucrats have been particularly useless, tailing a long way behind their members. Whilst the average pay rise is running at 7%, the average increase in pay from simply changing jobs is running at 14%! And, before long, union members are going to get fed up of the prospect of ineffective one day strikes dragging on into the indefinite future, and will begin taking wildcat action, throwing up more militant and adventurous leaders, and moving to effective all-out strikes for higher pay. At that point, central banks will return to increasing liquidity, to enable firms to raise prices, to protect profits, and inflation rates will move into a second wave of rises.
As set out in previous posts, the increase in central bank policy rates of interest is not intended to tighten liquidity, and so reduce inflation. It is intended to encourage households and businesses to save rather than spend, and to slow the economy, even into recession, so as to increase unemployment, and so, hold back this growth in wages, and squeeze on profits. But, it cannot work, at these levels of nominal interest rates, because they remain below current levels of inflation. If households and businesses think those levels of inflation are only transitory, as central banks claimed for more than a year, then that may not matter. If they think inflation is going to fall to 2%, or even 3%, a nominal interest rate of 5%, will appear to them as a real rate of 2%. But, US core prices are still rising at 5.3%, meaning a US rate of 5% is still negative in real terms. In the UK, with core inflation at 7.2%, even the current rise of UK interest rates to 5% means that, in real terms they are – 2.2%.
So, rather than being an incentive for households to save rather than spend, they continue to be an incentive to spend rather than save, at least in relation to durable consumer goods, holidays and so on. The only area of spending in which they are an incentive to save rather than spend is in relation to assets. If you are thinking of buying a house, or moving to a better house, there is a strong incentive to save, if, as expected, house prices fall by 30%. Similarly, if you were putting money into a pension fund, or some kind of mutual fund, there is an incentive to put the money into the bank or money fund, because a sharp fall in the prices of shares and bonds, will mean that your money will buy much more of them following that crash.
And that sums up the problem faced by central banks and conservative social-democratic governments, as described in previous posts. That is the R* rate is much higher than the R** rate. For central banks to raise interest rates to a level that causes households to stop spending on consumer goods, or even borrowing to finance consumer durables, holidays etc., requires those rates to rise much higher, so that they are above current, and expected levels of inflation. But, already, the current levels of interest rates are causing asset prices to come under pressure, particularly in the property market. In short, they are likely to cause asset prices to crash long before they could cause the economy to go into the kind of recession the speculators are demanding to push down wages.
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