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Understanding the inflationary moment

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Jonathan Starling is a socialist writer with an MSc in Ecological Economics from the University of Edinburgh and an MSc in Urban and Regional Planning from Heriot-Watt University

We are, quite frankly, in an extraordinary period of inflation, with the cost of goods increasing. While we have a tendency to only react to what’s in front of us and think this is a Bermuda-specific issue, the reality is that it is at least a Western — Europe and North America — issue and, really, a global issue. Indeed, The New York Times noted in April 2022 that inflation is higher than it has been in the past 40 years. And, if anything, inflation has gotten worse in the time since.

While inflation does have some silver linings in terms of reducing the real value of debt, for the average person, inflation means a clear decline of real wages and anxiety at the grocery checkout. Quite frankly, inflation is hurting average people right now, and the working class in particular. This all begs the question, what can be done about inflation?

An obvious starting point is to first understand what inflation is and what causes it. Having established that, we’re at least in position to start contemplating solutions.

Inflation is a relatively simple-sounding word, but one that has complex causes and possible explanations. At times, there can be different drivers of inflation, affecting different commodities. And some areas of inflation may be present in one country but relatively absent in others. Despite this, I will try to give as simple and clear an explanation as possible within the parameters of an op-ed.

An overly simplistic explanation is to say that there is too much money chasing too few commodities, resulting in a simple supply-and-demand situation where the price of everything goes up. Fair enough. However, what is the cause of such a situation? Orthodox capitalist economists will generally put forward two possible causes:

1, Too much money being printed by the central bank, resulting in each dollar being worth less than before

2, Surplus demand in the economy — consumers are able to buy too much relative to the supply of commodities in the market, and thus prices go up

If one accepts the first explanation, one could trace existing inflation to how various leading economies — especially the United States — relied on multiple rounds of “quantitative easing” as a key tool for dealing with the Great Recession of 2008-09. Essentially, this was a monetary policy tool that sought to lower interest rates and increase the supply of credit money — by printing money.

In theory, expansion of the supply of money should correlate with corresponding levels of inflation. However, no such inflationary moment occurred during these rounds of quantitative easing; in fact, the opposite trend was observed where, over the past 30 years — until 2020 — inflation generally trended downwards while money supply trended upwards.

Accordingly, it is difficult to see how this explains the present inflationary moment. What quantitative easing did do, however, is produce cheap credit for financial — especially fintech — and real estate speculation, sending the stock market to all-time highs, while real wages stagnated and inflation barely reached about 2 per cent.

So what about the second explanation? This one would argue that the present inflationary moment may be traced to pent-up demand by consumers and expansions of public spending through various rounds of stimulus — support for businesses — and unemployment assistance during the pandemic. Alternatively, there is a labour shortage resulting in workers having enough bargaining power to demand higher wages, resulting in companies increasing commodity prices, in turn resulting in demand for higher wages, etc, in an inflationary spiral.

While the US certainly did see some pent-up demand in late 2021, this was not seen globally, while the present inflationary moment is a global phenomenon, leaving this explanation rather wanting. Does this mean that workers have too much power? This is rather unlikely — real wages have been falling since the peak of the pandemic, with rates of unemployment in the US today close to where they were immediately before the pandemic (about 3.5 per cent despite rising to about 8 per cent in 2020).

In Bermuda, unemployment has remained generally static at between 7 per cent and 8 per cent since before the pandemic. Accordingly, this explanation does not seem to apply: if anything, with real wages falling rather than workers having too much power, the pendulum has swung the other way, with owners of capital having more power than ever relative to wage-earners.

All right. So what is causing this inflation, then? The simple answer is that we are still experiencing the economic shocks of the pandemic, which plunged capitalist globalisation into chaos. A big factor there is the impact on China, which, despite the wholesale dropping of its stringent Covid policies, is still greatly affected by the pandemic — this time not by state lockdowns, but de facto lockdowns of its industry owing to Covid infections and backlogs in production and export.

Another big factor is, of course, the Russian invasion of Ukraine. This has disrupted the supply of both food (Russia and Ukraine are major agricultural exporters) and energy (Russia is/was a major energy exporter). Another big factor is the growing reality of climate change, of which significantly bad harvests throughout 2022 have led to food shortages. Indeed, there is some evidence that the massive avian flu outbreak of late 2022 — this is the primary driver of the increase in costs for chickens and eggs — can be traced to climate change.

Essentially, we are seeing demand for key goods remaining constant; however, the supply has been affected by supply-chain issues, war and climate change impacts.

I plan to explore the issues of monopolisation, financialisation and “greedflation” in future.

Jonathan Starling is a socialist writer with an MSc in Ecological Economics from the University of Edinburgh and an MSc in Urban and Regional Planning from Heriot-Watt University

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Published March 28, 2023 at 7:59 am (Updated March 28, 2023 at 10:15 am)

Understanding the inflationary moment

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