Around the world, inflation is a scourge for hundreds of millions of working people, cutting real wages and dragging living standards down. Joshua Koritz focuses on the experience in the United States, still the most powerful economy in the world, and hones in on the global factors that are making the new era of global disorder more inherently inflationary.
For many young people, the word inflation was an academic term associated with history books. That is, until 2022 when nearly the whole world experienced a dramatic rise in prices (that’s all inflation is, the average rise in prices of goods and services).
It was on the heels of the pandemic that inflation rates jumped, averaging 8.8% worldwide leaving no region immune. Many wealthy capitalist countries hit their highest level since the 1980s with the US at 8%, Germany at 8.8%, and the U.K. at 11.1%, and global inflation rose to 8.8% (IMF statistics). This is in sharp contrast to the past 20 years when inflation in the US, for example, averaged around 2% per year. While most measures of inflation show the rate lowering, many economists are saying that the US Federal Reserve’s target of 2% for the US is no longer realistic in the new era we have entered globally.
As high as 2022 inflation was in the US. and many European countries, it was far worse elsewhere. Turkey experienced over 50% inflation – spiking as high as 80%. That’s the equivalent of prices rising 10 times faster than in the US in the summer of 2022. Argentina, Venezuela, Lebanon, and Zimbabwe were worse. Each experienced over 100% inflation in 2022, meaning that prices doubled as compared to the previous year.
Working people around the world are suffering from rising prices. Our wages have not kept up and our savings are eroding in real value. In the UK, this represents the fastest decline in living standards since the 1950s. But this wealth hasn’t disappeared. In essence, this represents a massive transfer of wealth from working people to the capitalist class.
Inflation is the measure of average price increases. Seems simple. However, while the effects of inflation are often obvious to anyone, the causes of the present surge are multifaceted. They include:
- A new and less stable world economic order where China and the US compete for resources and investments – including the war in Ukraine.
- Vast amounts of investment speculation – encouraged by “easy money” policies and stimulus payments to corporations – boosting prices well over their value based on speculation.
- The supply chain crisis that hit during the pandemic provided the spark for global inflation.
- “Greedflation,” or profiteering by key corporations who have a semi-monopoly position in the market.
Lately, the economic press expresses hopes for a return to a steady and low inflation in the US and Europe while corporations prepare for a coming recession. A steep economic downturn would be disastrous for working people everywhere. All signs though point toward a global economy poised for an era of sustained higher inflation. We look at why that is.
How Inflation Hits Working People
It’s no accident that most measures of inflation are based on the expenses of working people. This is because much of the economy still centers around the production of goods and services that relate to the basic needs of ordinary people: how to feed, clothe, and shelter people, provide care for them, and transport people and materials. When prices go up for any of these categories, working people on aggregate (on the whole) will purchase less – which means less revenue for grocery, retail, transit, and other companies.
Corporations build massive stockpiles of profits and investments. In less volatile times, it’s the fluctuations of stock markets, commodity markets, or bond markets – all run out of exchanges like on Wall Street – that seem to dictate if the economy is “good” or “bad.” These markets, while driven by speculative bubbles, are still ultimately tied to the “real economy” of production and services.
The role of the financial markets is a thread that continues throughout the history of the capitalist economic system. In fact, this investment capital or financial capital has existed since the origins of capitalism in the late 1700s though it has vastly grown in size and complexity and now dominates capitalism as a whole.
In the years before the 2008 financial crisis, working people in the US were convinced to take adjustable-rate mortgages on their homes, those were then packaged, sold, and gambled on by big banks and investors. When working people began defaulting as the rates went up, all the speculation based on those mortgages collapsed, the “bubble” burst, and it was the first of several popped bubbles that pulled the whole world into crisis. Millions lost their jobs and homes.
Corporations and Inflation: It’s Complicated
Some people argue that inflation is just corporations raising prices in order to get more profit. But while oil companies have taken advantage of rising prices to record their highest-ever profits, many big corporations are extremely worried about inflation and are putting massive pressure on the government to help tame it. Let’s look at why.
Inflation hits many businesses in a similar way to how it hits working people – the prices for raw materials, transportation, and other supplies go up. However, because businesses compete with each other (more on competition later), they may not immediately raise prices for fear of losing customers to their competition. When the costs for businesses go up, but the prices for consumers don’t, profit margins are lowered. Lower profit margins mean angry investors and reluctant creditors, usually big banks. In order to keep businesses in the black, they need to raise prices or risk going into debt.
That’s not all. When prices rise faster than wages, consumer spending falls as working people are forced to cut back. Big business and their political representatives have the real worry that if inflation gets out of control, it could cause a swift decrease in the purchasing of groceries, fuel, electricity, smartphones, etc, and thus be a threat to their profits.
Consumer spending, and particularly US consumer spending since the 1970s, is an important engine of the world economy. As long as products, commodities, and services are being bought, that means the big bosses, the banks, and the billionaires have money flowing to them. This is a vital cog in the financial system which is so often discussed in terms of much more abstract entities like hedge funds, bonds, and stocks. Much of the value of those items is dependent on the continued spending of working people to keep the economy moving.
But wait! There are times when corporations raise their prices and increase their profit margins without costs going way up. Mostly this happens in monopoly-like situations. From fertilizer prices to EpiPens, some prices have gone up just because there’s no competition and the corporation just can (currently farmers need to buy fertilizer and people with allergies need EpiPens, demand isn’t going down).
Many news articles about inflation have compared the current day to the 1970s, when the US and other wealthy capitalist nations experienced high inflation. Unlike the 1970s when profit margins shrank to near zero, corporations are currently reporting record profits. Fortune reports that “The companies in last year’s Fortune 500 alone generated an all-time high $1.8 trillion in profit on $16.1 trillion in revenue.” In this context, many have described price increases as “Greedflation.”
We should be careful, however, not to attribute all of inflation to price gouging or greed. As we’ve already seen, inflation also threatens corporations in the longer term. When some sectors profit but others get hurt, the bankers and investors who loan the money and call the tune break even. They don’t want to break even, they want increased profits.
Rapidly-rising prices inject uncertainty and potential for social unrest that corporations and finance capital prefer to avoid. That is why the Federal Reserve, an institution that has spent many years printing “easy money” for corporations and backstopped their debt during the pandemic, is fighting inflation: not to help workers, but to help corporations keep down the cost of their inputs and wages by trying to engineer a crisis “to get wages down” and discipline workers.
The current soaring profits go back not to the pandemic, but to the end of the Great Recession, 2010 or so. The graph below from Societe Generale shows that quite clearly.
That said, the graph definitely shows a bump once inflation started rising. This brings us back to the idea of inflation being a transfer of wealth. Most minimum wage laws in the US do not adjust with inflation and despite average wage growth, inflation has consistently been higher than wages since the beginning of 2020.
Those two data points combined show that since inflation began to rise in 2021, the super-rich have managed to use rising prices to transfer more wealth from working people to add onto already record profits. It should be stressed though that the factors driving record profits will not last and are already being undermined as central banks are forced to cut back on “easy money” as we will explain.
The New Cold War and the Pandemic
Prices will continue to rise faster in the current era than most working people have experienced in their lives up until now. While there are many factors for the current surge of inflation and huge debate about the deeper causes, the immediate triggers are clear: as countries and economies shut down to halt the spread of COVID-19, supply chains for everything from raw materials like nickel or cobalt to finished goods like iPhones or laptops backed up. The economy, which had moved to “just-in-time” production methods, where no inventory is kept onsite and instead delivered exactly the minute it’s needed, was unable to make up for these increased costs and this put pressure on prices to rise.
In our view, the seeds of this inflation come from the breakdown of the globalized neoliberal economic order.
The prices of cars, apples, or electricity for example, are all influenced by international events and costs. From auto parts being produced in multiple countries before being assembled in Mississippi, to apples imported from China or cherries exported from Washington State to Japan. Most electricity is created by burning fossil fuels, for example, oil and natural gas before the war in Ukraine was sent to much of Europe from Russia using a massive system of pipelines.
The global economy is increasingly starkly divided by the competition between the US and China. That competition is both economic and political as the capitalists of both countries jockey for control over everything from oil to microchips, wheat to logistics software.
Yet, even as the world “deglobalizes” and splits into two camps, the economic links between the nations have not simply been cut. Global supply chains and the continued US-China trade were exposed during the pandemic and the supply chain crisis it caused. Spurred by this crisis, the Biden administration encouraged “reshoring” or “nearshoring” – bringing production back to the US or closer countries and reversing a decades-long trend of moving production from country to country chasing low wages.
Many commentators are now calling the conflict between the US and China the New Cold War. International Socialist Alternative has been saying this for years! This is an apt descriptor as the competition is both economic and political. For example, China’s massive Belt and Road initiative challenged US economic power in Asia, Africa, and Latin America. Conversely, the Biden administration used executive orders and the recent CHIPS Act to declare semiconductor materials “strategic commodities” and devote funding to manufacturing microchips in the US. This move was designed to wrest microchip production from China’s influence, including European companies that might still trade with China.
This polarization of the world economy takes place as US corporations have struggled to find profitable investments in expanding production as the bulk of recent record profits have come from the bloated financial casino. They have squeezed every cent of profit out of production and distribution methods – and still look to technology like AI for more advances – but they’re cutting close to the bone. This is despite “free money” in the form of nearly 0% interest rates on loans from the Fed and the hundreds of billions given to corporations in the monetary and fiscal measures during both the 2008 Great Recession and the pandemic stimulus spending.
China’s economic and political power increased at the beginning of the 21st century as it became the “workshop of the world” focusing on manufacturing and production. The last decade has seen this falter, yet Chinese capitalists increasingly come into conflict with US interests.
Just-In-Time And The Search For Profitable Investments
Worldwide, just-in-time and “lean” production methods helped disguise the longer-term trend of decreasing profits in the 1990s and 2000s. The pandemic crushed international supply chains and exposed the dangers of just-in-time production.
As the pandemic spread, China’s Zero Covid policy shut down manufacturing and transportation and suddenly international trade ground to a halt. Ports experienced massive backups in part due to a shortage of truck drivers as already placed orders and shipments were delayed due to efforts to slow the spread of COVID.
Suddenly, just-in-time production couldn’t get supplies quickly enough. Prices went up because it was impossible for companies to make enough to meet demand and they were able to sell to the highest bidder. There was a real crunch for smaller producers whose orders were pushed down the queue as big suppliers gave priority to bigger contracts. Seemingly random items became scarce: bicycles, used cars, and eggs for example.
Particularly the scarcity of semiconductors, which are a vital component for any computer, smartphone, or anything with circuitry, meant a scramble and bidding war for products based on them. For example, schools that relied on Chromebooks for remote learning simply could not get more.
The Fed’s Easy Money Ends
Before high inflation and before the pandemic, the US Federal Reserve and other central banks sought to restart the economy after the Great Recession of 2007-2009. They lowered interest rates for loans to big banks to near zero in the hope that this would encourage more investment and loans to investors. This meant that banks could get loans at rates that were less than inflation. Basically, the Fed and central banks were paying big banks to take on debt. They also pumped trillions of dollars directly into the financial markets through a mechanism called “Quantitative Easing.” Together these measures are called “easy money.”
Part of why this did not spark wider inflation was that the overall economic trend at that time was deflationary rather than inflationary, meaning there was actually downward pressure on prices. Deflationary pressures stemmed from the significant overproduction of goods and the decline in real wages of working people who, on aggregate, could not afford to purchase the inventory.
The 2007-2009 crisis marked the beginning of the end for neoliberalism, a paradigm begun in the 1970s. Stemming from a decline in profitability at the end of the post-WWII boom, neoliberalism focused on breaking down barriers to the movement of capital and pushing back workers’ gains, popularly called “globalization.” These efforts found success – for a while – before creating massive overproduction. Neoliberalism hit a wall with the 2007-2009 crisis and the response from the capitalists was a desperate attempt to keep their party going and save their system.
Fast forward a decade and, in response to inflation rates rising on their way to 8%, the Fed began raising interest rates in March 2022. Meanwhile, they have massively scaled back Quantitative Easing measures. This ended the “easy money” era – which was never easy for working people. Taken alongside the massive stimulus checks given to big and small businesses during the pandemic, these policies increased the amount of money in circulation without increasing the real economy of things and services.
When more money exists, investors scramble to find ways to put it to profitable use. Remember that in the recent period finding profitable investments in expanding production is increasingly very difficult. Instead, this money largely went into speculation in assets like real estate securities or crypto-currency. These bubbles of speculation (gambling in essence) largely kept the increased money supply out of the real economy but it did directly affect working people by raising the cost of housing.
Of course, the rising interest rates now being imposed by central banks are also hurting working people as mortgages move beyond affordable and the cost to borrow money soars.
Volatility and Market Power
A further cause for corporations to raise prices is increased uncertainty in the economy. Now I know what you’re thinking: the point of a market-based system is that there is uncertainty, it’s not directed by any one entity and that is (proponents argue) a benefit. But at the most basic level of decision-making, corporations want to hoard cash when they have trouble predicting the economy in the near future. They do this by raising prices, which explains how so many companies raise prices at the same time and don’t undercut each other during times of high volatility.
To get specific, before the pandemic eased and the supply chain crisis relaxed, it was made worse by the invasion of Ukraine by Russia. Suddenly the price of oil, because Russia is a major oil and natural gas producer, shot up. The cost of transporting commodities across oceans rose alongside the cost of oil needed to power container ships.
The war in Ukraine also creates uncertainty for corporations and investors because behind it is the imperialist struggle between China and the US and the questions this poses for control over Taiwan and its microchip industry. No one knows the answers – when will this cold war heat up? Will more tariffs make certain raw materials more expensive to source?
Alongside just-in-time production, the increased monopolization, or market dominance, of companies multiplies the effects of supply chain issues which are also tied to volatility. In the past few decades, the tendency toward consolidating market power in just a few companies has grown. According to the Fed (which conducts a lot of research), “the US economy is 50% more concentrated than in 2005,” meaning there’s been a considerable increase in the market power of monopolies in just the past 20 years. For example, despite thinking you have a huge array of choices when you buy new sunglasses: Panama Jack, Oakley, Ray Bans – but it turns out all sunglasses in the US are produced by only two companies.
Dominant “market power” as the press now calls a monopoly, is always bad for consumers looking for low prices. Remember the “Pharma-bro” Martin Shkreli? He was the face of pharmaceutical companies that lobbied for legally granted monopolies for drugs like insulin and EpiPens and then proceeded to jack up prices.
Monopolies and oligopolies create more volatility, but they also have the power to pass on the costs of that volatility to consumers. If one company controls the entire market for sunglasses, and their supply chain breaks down, there’s no other way to get sunglasses and the monopoly can charge whatever they feel is most profitable. On the other hand, if there are many firms producing sunglasses, that means many supply chains, and if one company can’t deliver, another can and will be happy to at a lower price lest the other competitors undercut them.
Age of Turmoil – What Does That Mean?
The imperialist conflict between the US and China has forced a rethink among capitalists. Whereas only 15-20 years ago, they were still talking about the end of the nation-state and global corporations, now that thinking has reversed. The US and China are marking resources as “strategic” and doing everything to make sure they retain control over these interests.
Now, stability and control over resources are being prized higher than finding the lowest wages for production. As more production is moved closer to the US, China, and Europe, it will be harder for corporations to lower production costs on a regular basis. The basic pressures to raise prices are baked in.
Nearshoring and deglobalization in the new era will prevent cheaper imports from keeping prices down. Greater worldwide instability means corporations demand higher prices, pay higher interest on loans, and hold more cash in reserve. Some of these trends are new and others are continuations from the previous period.
Taken all together, the decoupling of the US-China economic relationship, the deglobalizing of the economy with nearshoring, and new cold war tensions will continue to drive volatility. This volatility combined with the breakdown of just-in-time supply chains and the shocks that come with wars will continue to create the pressures to keep inflation high.
We Won’t Pay For Their Crisis
As working people worldwide experience the worst of the effects of inflation, the capitalist class, including billionaires and corporations celebrate their record profits. Of course big business is worried about inflation and the potential of a coming recession and they want us to pay for it.
The Fed’s crude and brutal policy of raising interest rates is explicitly about provoking a recession in order to create more unemployment and lower wages in order to cut demand. But in the new era of disorder and deglobalization it is not even clear that this will work. They may end up in the same trap as in the 1970s, with a stagnating economy and prices still rising, a situation termed “stagflation.” In truth, the capitalist class is lurching from crisis to crisis and each “solution” is just creating new problems.
Under this economic system of capitalism, those with the power: the capitalists, corporations, and billionaires, will always seek to make the working class pay for any economic crisis.
Historically workers have turned to organizing unions to exert their power. The working class is the group in society that does the work to produce and deliver the goods and services that make up the economy. Working people have exerted their power through strikes and even taking over workplaces. Socialists around the world are here for it. We are workers and we seek to organize economically and politically. We say to the bosses and to our brothers, sisters, and siblings: we won’t pay for their crisis. If they can’t figure out a way to feed, clothe, and house everyone, let the working class try. Imagine the resources available to society if key sectors of the economy were taken into public control. We have a world to win.