Rising corporate profits have caused 45% of inflation in Europe, compared to 40% for rising import prices and just 15% for workers’ wages, according to research by IMF economists.
by Ben Norton
Part 3 - Rethinking inflation
Contemporary mainstream economists typically discuss three types of inflation: demand-pull inflation, cost-push inflation, and built-in inflation.
Cost-push inflation happens when the prices of inputs used in the production process increase. When the international prices of commodities like oil or gas skyrocket, in response to the war in Ukraine for instance, this contributes to cost-push inflation.
Built-in inflation accounts for expectations that inflation that happened in the past will repeat in the future. Corporations often increase their prices every year, for example, simply because they expect costs to increase, not because they actually did increase (but by doing so, costs do sometimes increase).
However, discussions of inflation among Western neoliberal economists are usually focused on demand-pull inflation.
Cost-push inflation happens when the prices of inputs used in the production process increase. When the international prices of commodities like oil or gas skyrocket, in response to the war in Ukraine for instance, this contributes to cost-push inflation.
Built-in inflation accounts for expectations that inflation that happened in the past will repeat in the future. Corporations often increase their prices every year, for example, simply because they expect costs to increase, not because they actually did increase (but by doing so, costs do sometimes increase).
However, discussions of inflation among Western neoliberal economists are usually focused on demand-pull inflation.
The godfather of monetarism, infamous right-wing University of Chicago economist Milton Friedman, argued that “inflation is always and everywhere a monetary phenomenon”, and specifically consisted of demand-pull inflation: “too much money chasing too few goods”.
Friedman was an inspiration for Chile’s fascist dictator Augusto Pinochet, who came to power in 1973 in a CIA-backed military coup against the South American nation’s democratically elected socialist president, Salvador Allende.
Friedman was so fixated on government monetary policy that he essentially argued that cost-push inflation doesn’t exist, claiming it was merely a product of demand-pull inflation.
But this recent IMF study shows that the right-wing, monetarist view of inflation is much too simplistic. Capitalist firms can cause inflation simply by hiking up their profits to unreasonable levels.
Friedman was an inspiration for Chile’s fascist dictator Augusto Pinochet, who came to power in 1973 in a CIA-backed military coup against the South American nation’s democratically elected socialist president, Salvador Allende.
Friedman was so fixated on government monetary policy that he essentially argued that cost-push inflation doesn’t exist, claiming it was merely a product of demand-pull inflation.
But this recent IMF study shows that the right-wing, monetarist view of inflation is much too simplistic. Capitalist firms can cause inflation simply by hiking up their profits to unreasonable levels.
Nevertheless, some monetarist holdovers today still insist that the inflation the world saw following the Covid-19 pandemic was merely caused by central bank money printing.
This fails to explain why there was little consumer price index inflation in the first 12 years of quantitative easing (QE), from 2008 to 2020, before the pandemic hit, and why QE suddenly caused prices to rise only around 2021.
This fails to explain why there was little consumer price index inflation in the first 12 years of quantitative easing (QE), from 2008 to 2020, before the pandemic hit, and why QE suddenly caused prices to rise only around 2021.
Economist Michael Hudson has pointed out that QE by the US Federal Reserve and European Central Bank in fact fueled asset price inflation, not consumer price index inflation.
In an interview with Geopolitical Economy Report in September 2022, Hudson explained:
In an interview with Geopolitical Economy Report in September 2022, Hudson explained:
The result [of quantitative easing] has been $9 trillion, essentially, of bank liquidity that the Federal Reserve has pushed in. Now, despite the fact that it is asset price inflation, the fact is that asset price inflation has all occurred on credit. The asset price inflation has occurred when the Federal Reserve makes basically repo swaps with the banks, enabling the banks to deposit some of their packaged mortgage loans, or bonds, government bonds or even junk bonds, with the Fed. And they get a deposit with the Fed that enables them to now turn around, as if the Fed was depositing money in the bank like a depositor, letting it lend more, and more, and more for real estate, which has pushed up the price. Real estate is worth whatever a bank will lend against it. And the banks have been lowering the margin requirements, easing the the terms of the loan. So the banks have inflated the real estate market, and also the stock and bond market. The
bond market from 2008 today has had the biggest bond rally in history.
You can imagine the bond prices going down to below 0%. This is a huge
capitalization of the bond rate. So it has been a bonanza for people who held bonds, especially bank bonds. And it has inflated the top of the pyramid. But if you inflate it on debt, then somebody has to pay the debt. And the debt, as I just said, is the 90% of the population. So the fact is that asset price inflation and debt deflation go together, because the wealth part of the economy, the ownership part, has been vastly inflated, the price of wealth relative to labor. But the debtor part has been has been squeezed by families having to pay much more of their income on mortgages, or credit cards, or student debt, leaving less and less to purchase goods and services. So
if there is a debt deflation, then why do we have a price inflation
now? Well, the price inflation is largely a result of the war [in
Ukraine], the sanctions that the United States has imposed on Russia. Russia was, as you know, a major gas exporter, oil exporter, and also the largest agricultural exporter in the world. So if you exclude Russian oil, Russian gas, Russian agriculture from the market, you’re going to have a shortage of supply, and you’re going to have the prices way up. So the oil, energy, and food have been a key element. And also, under the Biden administration and certainly the Trump administration, there has been no enforcement of monopoly prices. So essentially companies have been using their monopoly power to charge whatever they want. And even though there wasn’t really a shortage of gas or of oil earlier this year (2022), you had a huge spike in the price, for no other reason than the fact that the oil companies could charge it. Partly this was done by financial manipulations in the forward markets. The financial markets had bid up the price of oil and gas. But also other companies have. And right across the board, if you have a company in a commanding position of being able to control the market, you have essentially permitted monopolies to take place. Well, Biden had appointed a number of anti-monopoly officials that were going to try to impose anti-monopoly legislation. But they’re not supported by the Democratic Party or the Republican Party enough to really empower them to have had much effect so far. |
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