On the Wave of Inflation and the Recession that has Begun
In June, the Consumer Price Index (CPI), a measure of consumer inflation, rose to 9.1% in comparison to a year earlier, its highest level in over 40 years. Meanwhile hourly wages of private-sector employees have risen from a June 2021 average of $30.52 to a June 2022 average of $32.08, a “gain” of 5.1% – or what is the same thing: a loss of 4% in real hourly wages. In other words, even though workers have more dollars in their pockets, they are able to purchase fewer goods and services with those dollars than they could with less dollars a year ago.
Thus reality is once again demonstrating the falsity of that tired tune, even today being sung by its bourgeois supporters, according to which rising inflation is a result of rising wages. The underlying assumption there is that capitalists set prices according to wage fluctuations. In reality, of course, wages may increase while capitalists are unable to set higher prices, and conversely, wages may fall without capitalists being compelled to lower prices.
Today the growth rate of wages has lagged far behind the rate of inflation. It should be clear that – far from being caused by rising wages – this inflation is occurring at the expense of the conditions of life of the working class.
What is Inflation?
In order to understand the current inflationary wave, we must understand inflation in general. In order to grasp the phenomenon of inflation, we must begin with a key fact: money today takes the form of mere signs of value. What does this mean?
Once upon a time, coins were made of precious metals (gold, silver) and their values were measured in weight. For example, if the 3.5 gram gold coin that the government of Venice in 1400 called “1 ducat” was worth 8 bushels of wheat, it was because in that society, the same amount of average labor was required to mine and refine 3.5 grams of gold as was required to produce 8 bushels of wheat.
Of course, coins wear away as they circulate, so the 1 ducat coin might eventually only have a weight of 3.3 grams. And yet, it turned out that wheat-sellers were still willing to accept the worn-away 1 ducat coin in exchange for their product. In this way, the nominal value, or denomination, of the coin (1 ducat) eventually separated from its intrinsic value, measured in weight (3.3 grams). It was not long before governments realized they could mix base metals into their coins without in any way disturbing the sales and purchases of goods and services.
Eventually, governments began issuing pieces of paper to represent the metallic money. Paper money issued by the state is an extension of the worn-away coin. In fact paper money is more or less intrinsically worthless. Since paper money is a mere sign or token of value, we will say it is a type of token money.
The amount of token money needed to circulate goods and services in a given time-period is based on the various factors that would determine the amount of metallic money required for circulation: the number of goods and services for sale, their prices, and the average number of times a unit of money is used for purchases in that year. If government-issued token money exceeds the amount of metallic money that would be needed for circulation, each unit of token money will be devalued accordingly, and prices will rise. This is the phenomenon of inflation.[1]
In capitalist society, inflation is closely linked with the rate of profit.
What is the rate of profit? The rate of profit is the amount of profit generated by a given amount of capital invested. For example, $100 invested in hiring workers and purchasing raw materials might generate $25 in profit, or it might generate $3 in profit. In the first case, the rate of profit would be 25%, while in the second case it would be 3%. The society-wide rate of profit measures the social productivity of capital, i.e., its power of valorization, which refers to its capacity to create new value per unit of capital invested. The general rate of profit tracks the real rate of accumulation of capital in society, the rate at which capital is reinvested on an ever-larger scale at the end of each production cycle.
Issuing new tokens at a high rate in defiance of a falling rate of profit has predictable consequences. When the state issues token money in an attempt to extend accumulation beyond the real possibilities of valorizing capital, the issue of token money will not represent an increase in the value of goods and services. Rather, each unit of money will be devalued and prices will rise to the same extent, i.e., the devaluation of capital will be expressed as a devaluation of token money. Inflation is the process in which this necessary devaluation of token money – over-valued at the time of its creation – is carried out.
Today in the US, the Federal Reserve essentially issues credit money, marking up accounts in banks in exchange for bond purchases. The banks then loan out their increased balances to functioning capitalists. In this way, banks can elastically expand transactions between capitalists relatively independently of the real conditions of capital accumulation. If the growth in the supply of money-tokens outpaces the possibilities of valorization, then the result is a rise in the general price level.
One consequence of this is that in periods of high inflation, capitalist profit depends less on expanding value than on outright robbery: raising the prices of goods and services while reducing the purchasing power of workers.
The Current Inflationary Wave
The current inflationary wave has gone through two phases:
—March 2021-March 2022. This first phase resulted from (1) the cataclysmic effect of the Covid crisis on production and transportation of consumer goods, coupled with (2) a massive intervention by the capitalist state. First, the central bank accelerated its issuing of token money by using newly-created bank reserves on its balance sheet to purchase US Treasuries and mortgage-backed securities on the open market. Until the tapering at the end of 2021, such purchases averaged a staggering $120 billion in bonds per month. Second, the imperialist state dispensed trillions in Covid funds, with capitalists getting around $1 trillion dollars more than workers received in unemployment benefits.
—March 2022-Present. In the second phase of inflation, the proximate causes of inflation in the previous period receded: there has been an easing of shortages of consumer goods, as we have seen with e.g., the steady upward climb of the inventory to sales ratio; the demand-effect of the government Covid intervention has worn off; and the Fed “quantitative easing” policy has turned to “quantitative tightening.” The US Central bank increased the fed funds rate four times (25 bps in March, 50 bps in May, 75 bps in June, 75 bps in July).[2]
However, despite the changed conditions, consumer prices continued to climb through June, fueled by supply problems in raw-materials producer inputs, particularly in the energy and food sectors. These supply problems have been in part the result of the harsh US-EU-Japan sanctions regime targeting Russia following its February 24 invasion of Ukraine. Following February, energy prices have soared and wheat prices reached a historic high in early May. The point should not be lost on anyone: the US government is willing to reinforce painful inflation on its own working masses in order to gain leverage over spheres of influence vis-à-vis the rival China-led imperialist bloc that includes Russia.
Fundamentally, while in the second phase interest rates have increased – lowering the ratio between the supply of token money and the demand for it – the supply of token money still exceeds the possibilities of valorization. Although the printing presses are no longer working overtime, the rate of profit is also now in decline. If we take, as a crude measure of profitability, adjusted profit per unit of gross-value added of nonfinancial corporate business, we see that the period beginning Q2 2021 – the onset of the inflationary wave – corresponds to a brief period of stagnation followed by a decline amounting to –5.77% by Q1 2022:
https://fred.stlouisfed.org/series/A466RD3Q052SBEA
In July, with the latest jobs report by the Bureau of Labor Statistics (BLS) showing a steady, low unemployment rate of 3.6% (with some 372,000 jobs added) the Fed raised its benchmark rate – this despite its own Beige Book report indicating a slackening in the labor-power market (“nearly all Districts noted modest improvements in labor availability amid weaker demand for workers”).
The latest “jumbo” rate raise will accelerate the deepening of the recession that has already begun. Second-quarter GDP contracted by –.9%. There are some signs that the inflationary wave has peaked. Consumer demand remains subdued. Brent crude prices are down, as are steel prices and other key raw materials for industry. Food prices remain high, although with some moderation, including wheat prices. Durable goods have not significantly contributed to inflation since the first phase.
For the working class, the transition from inflation to recession – in the worst-case scenario, to both (“stagflation”) – will be the transition from one form of misery to another. The most conscious among us must draw upon the life experience of the broad mass of workers to promote the development of unions that proceed from the class interests of workers. Such organizations are our only means of defense against lowered real wages, increased indebtedness, mass layoffs, and every other tactic in the fighting handbook of the bourgeoisie.
[1] Here we distinguish inflation proper from increases in the general price level based on changes in the value of goods due to declining labor productivity. (Low labor productivity means more labor on average is required to produce goods, which in turn means – everything being equal – that prices will rise.)
[2] The current strength of the dollar vis-à-vis other currencies is largely due to the aggressiveness of the US Central Bank in raising interest rates relative to other imperialist countries, which increases the demand for US dollars.