June 20, 2022

I can’t help but feel a sense of déjà vu at the current debate about global inflation. The similarities between today’s spiralling situation and the inflationary crisis of the Seventies are too striking to be ignored.

Nearly 50 years ago, the oil crisis of 1973 sent inflation skyrocketing across Western countries. It was a textbook case of imported inflation, which in a context of close-to-full employment and strong union bargaining power triggered self-reinforcing inflationary pressures, as companies raised prices to defend profit margins while workers in turn demanded wage increases. This price-wage (or wage-price) spiral was a response to the inflationary pressures coming from abroad — not their cause.

However, the Seventies crisis came at a time when the “compromise” between labour and capital that had provided the bedrock for the post-war economic-political settlement was already heavily strained, as each side attempted to claim a greater share of a shrinking cake. Economic and political elites realised that the inflationary crisis provided them with the perfect opportunity to deal a deadly blow to the post-war full employment regime, which in their view had led to the working masses becoming too powerful. They concluded that it was time to strike back — to break the back of organised labour and reassert the unfettered power of capital over society.

Inflation represented the perfect casus belli. With the theoretical backing of monetarist economists such as Milton Friedman, they crafted a narrative that blamed all economic problems — beginning with inflation — on excessive union power, unreasonable wage demands by workers and bloated welfare systems. The neoliberal counter-revolution had begun, a crucial aspect of which was the deliberate engineering of unemployment through a radical tightening of monetary and fiscal policies, in order to crush the bargaining power of unions. Combating inflation was not the end — it was the means.

As Alan Budd, economic advisor to the Thatcher government, would later admit: “There may have been people making the actual policy decisions… who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that [monetarism] would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes.”

In many ways, the same thing is happening today. As in the Seventies, inflation is surging, threatening the post-pandemic recovery and raising once again the prospect of stagflation — the simultaneous incidence of stagnant or negative growth and accelerating inflation. And as in the Seventies, establishment economists and commentators have been quick to blame the surging prices on excess demand (people having too much money to spend), fuelled by excessive wage increases and over-expansionary fiscal and monetary policies during the Covid crisis.

Their proposed solution is the same as that adopted in the Seventies: central banks must hike up interest rates and cut back on fiscal spending. In one word: austerity. And that’s what they’re doing. Not only the US Federal Reserve, but central banks all over the globe — including, most recently, the ECB — are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades.

The problem with all this is that — again, just like in the Seventies — the recent inflation has relatively little to do with excess demand and excessive wage growth. In fact, it has mostly supply-side origins, triggered by the Covid crisis and now the Ukraine war, and rooted in the systemic deficiencies of neoliberal globalisation. From a Western perspective, the global lockdowns of 2020 and 2021 caused a collapse of global supply chains in durable goods and industrial components, as well as of cheap, flexible and abundant labour in low and middle-income countries. These foreign supply-side bottlenecks, which in turn were exacerbated in several countries by domestic supply-side bottlenecks — such as a shortage of long-haul truck drivers and dock workers in the US and UK — are the reason prices were on the rise well before the outbreak of the conflict in Ukraine.

In other words, lockdowns are to blame — not the fiscal measures adopted to dampen their effects. This is what we might call lockdown inflation, which is now flaring up once again due to the recent Chinese lockdowns.

In recent months, the Ukraine war and the sanctions on Russia have caused inflation, especially energy and food prices, to grow at an even faster pace. These price rises have several self-reinforcing causes. On the one hand, the conflict has directly disrupted exports of crude oil, natural gas, grains, fertiliser and metals, pushing up energy, food and commodity prices. These supply-side problems have been further exacerbated by the West’s utterly self-defeating sanctions against Russia, which have left European countries scrambling for more expensive alternatives to Russian oil from America and Africa — as well as by speculation in commodity (futures) markets.

Indeed, notwithstanding the conflict in Ukraine, changes in supply and demand in themselves can’t justify the energy price increases. Global oil production, including from Russia, has actually increased compared to the same time last year (indeed, some Western countries, such as Italy, are importing more crude oil from Russia today than they have in past ten years, even though Russia’s recent decision to slash its gas supply to Europe suggests this is about to change). But energy traders, most of whom work for the world’s largest oil companies, saw the conflict in Ukraine as a perfect opportunity to hike up prices, knowing that most people would simply blame the rising prices on “the war” or even see it as “the price to pay to defeat Russia”.

This is why, as more and more people struggle to make ends meet, global energy giants such as Exxon Mobil, Shell, BP and Chevron have raked in record profits in the first quarter of 2022, far exceeding their revenue during the same quarter in 2021 — all because they are passing on ridiculous mark-up prices to consumers. As President Joe Biden recently put it, oil companies have “made more money than God this year”. Likewise, speculative activity by hedge funds, investment banks and pensions funds, fuelled by QE-induced cheap credit, rather than “supply and demand”, is also helping to drive up wheat prices, despite comfortably high global wheat stocks, raising the prospect of an unprecedented global wave of hunger. This is what we might call speculative inflation.

To make matters worse, certain mega-corporations that dominate entire sectors are able to use the (temporary) shortages, production cost increases and market chaos to raise their own profit mark-ups without losing customers — which is why corporate profit rates in the US and elsewhere have soared to their highest level since the Second World War. As even the Chair of the Federal Reserve, Jerome Powell, has said, large corporations with near-monopolistic market power are “raising prices because they can”. This is what we might call profit or market power inflation — or what some have termed “greedflation”.

Indeed, despite all the talk of the need to rein in wages to avoid wage-price spirals, the reality is exactly the opposite. As a result of the structural loss of workers’ bargaining power during the neoliberal era, workers in this new inflationary era are unable to protect their real wages, which are falling off a cliff in many countries as nominal wages grow much less than the general price level. Blaming workers for the current situation is a textbook example of victim blaming.

In this context, raising interest rates and pursuing fiscal austerity will not only achieve little or nothing in terms of lowering price rises that are driven by primarily supply-side factors — but by depressing aggregate demand and economic activity and driving up unemployment, it will hurt wage-earners even more. Furthermore, it will “discourage investments that could ease some of the logistical bottlenecks that emerged during the pandemic crisis”, as a UN report reads — that is, long-term investments needed to increase domestic production (supply) and wean countries off their dependence on foreign imports, especially in the field of energy.

It would be naïve to assume that policymakers aren’t aware of this. So why are they pushing for such a solution? I would posit that once again, as in the Seventies, they are intent on exploiting the current inflation to engineer a recession and drive up unemployment in order to pre-empt a potential rise in labour bargaining power. After all, even if organised labour is still very weak, it is also true that labour markets — particularly in countries such as the US and UK — have been growing increasingly tight as a result of the post-lockdown surge in labour demand and Brexit in the UK. They are bound to remain relatively tight even in the future as the global economy undergoes a structural process of de-globalisation and reshoring.

In this context, recreating a reserve army of labour through austerity and engineered unemployment might be seen by capitalists as a way to ensure the balance of power between labour and capital doesn’t tilt too much towards the former, even at the cost of causing some creative destruction on stock markets — and of sabotaging the long-term shift towards a more environmentally and geopolitically sustainable model of greater economic self-sufficiency. Indeed, the Fed now predicts that unemployment will rise for the next three years as a result of its decision to hike interest rates.

Moreover, in the EU, monetary tightening is seen by European techno-elites as a way to get countries back on the path of neoliberal “structural reforms” after the pandemic put these on the backburner. As Robin Brooks, chief economist at the Institute of International Finance (IIF), recently said: “Behind closed doors, there is a feeling that Italy’s spread has been too low for too long. That stymied needed reforms and drove away private investors who want a higher yield. So spread widening after [the recent] ECB meeting is partly by design. Back to more market discipline…” So much for the chattering classes’ talk about the EU’s post-pandemic “progressive turn” and abandoning of its neocolonial approach to economic policy.

So what might an alternative labour-driven rather than capital-driven response to the current inflationary crisis look like? There’s no shortage of tools that would shift the burden of the adjustment on the strong — the corporate pandemic and war profiteers — rather rather than on the weak: workers and low-income families. In the short term, as the Dutch economist Servaas Storm writes, “temporary strategic price controls, accompanied by supply-enhancing policy measures, can be used to eliminate corporate profiteering and prevent key prices (of energy and food) from shooting up”. These include price caps on fuel, energy and basic food items. This would force corporations to accept a reduction in their profit share, while allowing the labour share of income to rise.

Meanwhile, financial regulation cracking down on excessive speculation in energy and commodity markets would help lower inflationary pressures coming from financial markets. Redistributive fiscal policies, the opposite of austerity, are also needed to shield vulnerable groups from the higher costs of energy, fuel and other basic goods. And in the longer term, inflation control must be unconditionally subordinated to broader societal aims, such as boosting domestic supply and making economies more self-sufficient and less dependent on foreign imports. Ultimately, the debate about inflation is not really about inflation — it’s about the future of capitalism. And perhaps of the planet itself.

Sign up to UnHerd's new weekly email, in which Will Lloyd selects the best (and occasionally worst) writing from around the web.

Free, every Friday morning.