Following the surge in US Producer Prices, the UK is the latest developed economy to show that inflation persists, as central banks have continued to provide liquidity to enable firms to raise prices, to avoid cuts in their profits. UK consumer prices, as measured by the CPI, rose by 3.8%, in July, compared to the previous year. That compared to 3.6% in the previous month, and expectations of a rise of only 3.7%. The Bank of England, has never brought inflation back to its 2% target level, since the spike in inflation following the tsunami of liquidity pumped into circulation during lockdowns, and this figure stands at nearly twice that target level. Yet, in the UK, as in the US, as the speculators clamour for cuts in interest rates to boost asset prices, the central banks are complying with those demands.
Its worth summarising what prices are. They are the exchange-value of commodities as measured against the general commodity/money commodity, or, as Marx describes, in countries with fiat currencies, against the standard of prices/unit of currency. Like any other exchange-value, therefore, it depends on the value of the thing being measured, but also on the value of the unit of measurement. Just as with length, where a field may remain the same length, but can be expressed as, say, 100 or 1,000, dependent on whether its measured in metres or centimetres, so too with prices. The value of commodities, in aggregate, may be unchanged, or even be reduced, which is what happens as a result of continually rising social productivity, and yet prices, in aggregate, may rise, if the unit of measurement, for example, the Pound, is itself reduced in value. For a unit of currency, this reduction in its value is the result of an excess of it being thrown into circulation - inflation.
That is what happened with the surge in inflation following lockdowns, but the same thing was seen in the 1970's, and early 1980's, it was seen in the Weimar Republic in the 1920's, as well as in the USSR at that time, and in numerous other economies, from Argentina to Zimbabwe, where the state has simply printed money tokens in excess, and caused the value of those tokens to be shredded. But, its also worth examining why states do that. One basic reason, from the time they began issuing currency, they have debased it is that they thought they could pass off bad coin to pay for their debts. As with MMT, they confuse money with these money tokens/currency, which is like confusing a cow with the picture of a cow. They thought that they could simply “create” money, by simply printing more of the tokens, which are, in fact, only a facsimile of it. Its like thinking you can produce more cows, by simply photocopying a picture of a cow used as its representation.
As Marx describes, when economies had currencies which were redeemable in gold or silver, which acted as the money commodity, this was limited, because, if the value of the coins/tokens fell below their nominal or face value, i.e. the amount of precious metal they were supposed to represent, holders of the coins/tokens would simply redeem them for the precious metal. The excess was taken out of circulation. In practice, this is what happened in 1971, when France demanded to be able to redeem its Dollars for gold. When the US printed excess Dollars, from around 1962, to pay for its military spending on wars in Vietnam and so on, and to finance its domestic welfare programme, so causing a devaluation of the Dollar, its creditors/trading partners, eventually, decided enough was enough, and demanded to redeem their Dollars for gold at the official exchange rate of $35 an ounce. That official exchange rate was over stated the value of the Dollar, by a factor of ten at that time. Of course, the US, at that point, simply refused to honour its obligations, and ended convertibility of the Dollar for gold.
During the 1960's, the US in printing these excess money tokens, that became increasingly worthless, but which continued to pass them off, across the globe, at their nominal value, simply extracted tribute from the rest of the world, and, in the process, as these excess Dollars circulated in the world economy, created a growing inflation in global prices. It was that which became manifest in the inflation/stagflation of the 1970's and early 1980's. By 1980, the price of gold had risen from the official price of $35 in 1971, to $800 an ounce! The same happened with lockdowns, as governments printed money tokens to cover the payments they made to households and businesses to replace the revenues they lost as a result of being locked out of their workplaces.
But, of course, there is another side, as set out above. The price of a commodity may rise if its own value rises. But, that requires that productivity must fall, whereas, generally, productivity rises by an average of around 2% p.a. Having the value of commodities rise, therefore, is not something easily accomplished. The most obvious cause of a rise in value is, for example, if there is some kind of crop failure, or equivalent that causes raw material values to rise. But, even then, these raw material prices only constitute a fraction of the value of the commodities they are transformed into. If some reduction in the cotton crop causes the value of cotton to rise, it would pass through into the value of cotton thread, and, thereby, into the value of cotton cloth, and so on, into the value of all those things that cotton cloth is used to produce from shirts to sails. But, cotton may comprise only 10% of the cost of producing cotton yarn, so that, generally rising productivity will reduce the value of other inputs, as well as reducing the value of yarn itself. There may be no rise in the value of yarn, therefore, and even if there is, yarn will comprise only a fraction of the cost of cloth, which in turn comprises only a fraction of the cost of shirts, sails, etc.
To cause a general fall in social productivity, leading to a rise in the value of all or most commodities, therefore, requires some big social change affecting all production. Globalisation, and the reduction in trade restrictions, created such a large change, in the opposite direction. It hugely reduced the value of all commodities, but the ending of that process, and its reversal in the form of Brexit, of Trump's trade wars, and so on has caused some values to rise. The rise in UK consumer prices is partly a consequence of a devaluation of the currency, i.e. inflation, and partly a consequence of a fall in social productivity resulting from Brexit, and all of the frictions it has brought.
In the case of the US, and its tariffs the situation is different. Tariffs, of themselves, like any other tax, do not increase values. If the government puts a 10% tax on cars, that does not increase the value of cars. It simply reallocates the revenues into which the value of the car resolves. As I described recently, exactly how that plays out depends, but, ultimately, that 10% tax is paid out of surplus value, i.e. out of profits. But, that brings us to the other reason that states devalue their currencies, and why central banks were created at the start of the 20th century, and why economies moved to fiat currencies. That is that if currency values are maintained, the consequence of the overall rise in social productivity is that commodity prices should fall. One of those commodities is, itself, labour-power, and workers resist falling money wages, even if their real wages are rising. Its easier for states to devalue the currency each year, so as to cause some inflation, with prices rising, despite falling values, so that nominal wages rise. Whether those rising nominal wages go along with rising real wages depends on the extent of the growth of productivity.
In the case of Trump's tariffs, the tariffs themselves do not result in a rise in the value of commodities. The value of commodities, in the US, may rise, indirectly, for the simple reason that if imports to the US fall, and are replaced by US produced commodities, the value of those commodities may itself be higher. In other words, it has the effect of an import quota. But, when US workers, then, have to buy these higher value US produced commodities, that raises the value of their own labour-power, resulting in higher wages, which, in turn, means lower US profits. Its to avoid that that central banks increase liquidity to enable companies to raise prices to protect their profits in the short-term, leading to inflationary spirals.
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