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The economic causes of the cost of living crisis

Smokeandsteam

Smokeandsteam

Working Class First
Talking to members at work today a discussion started about the reasons for the cost of living crisis.

The consensus we eventually arrived at was that reading and listening to the media was no help in understanding what was going on. Their explanation offers up: economic activity in China, a post covid economic surge, Ukraine and seemingly mysterious matter that arises from thin air.

Nowhere is there any analysis of the elephant in the room (especially when comparing now with the infamous ‘crisis’ of the 1979’s : the global diminution of organised labour meaning that wages are collapsing everywhere in comparison to rising prices and inflation.

Also nowhere is corporate profit. The information below - which is staggering - is nicked from Adam Tooze and shows how boss profit is driving price increases which in turn is fuelling inflation

I’ve started this thread for further discussion on both of these key factors, and so that information can be shared that we can all use to make sense of, and explain, what is happening.



———

But what actually is driving the current inflation?

On both sides of the Atlantic, analysts have been busy decomposing the source of price increases. The results are striking

For the US Josh Bivens of the Economic Policy Institute has compared the factors driving the growth of unit prices between 1979 and 2019 with those contributing to inflation in the US since Q2 2020.

​
Source: EPI

Whereas in recent decades, unit labour costs (wages/productivity) have accounted for 62 percent of price increases and corporate profits for only 11.4 percent, with non-labour input costs (like energy) making up the rest, since 2020 the balance has been reversed. Since the COVID shock in 2020, wages have accounted for less than 8 percent of US price increases, as against corporate profits which accounted for almost 54 percent. Input costs, notably energy, have accounted for 38 percent.
 
Fascinating and important data from BIS on wage growth across the globe and focussing on where it might go given spiralling prices and inflation due to corporate profit.

This is a monumental piece of research and fhe key point that emerges - albeit with some blips in some sectors - is a seismic imbalance in the bargaining power of corporate profit against the organised working class. My own view is that the stories we tell ourselves about unionisation drives needs to be soberly put against what this report tells us. It also tells me that the old trope against inflation: smash the unions - isn’t very necessary in the current conditions as wages are firmly heading the wrong way (for us). However, even the global wage restraint isn’t compensating for rampant corporate greed

 
From the FT a useful piece explaining why the inflationary spike won’t last. I agree with every point made.

Sustained inflation does indeed arise when organised labour is able to assert its interests and when wages keep pace with rising costs forcing capital to either increase prices, fight back against our class or concede some of its profits to labour.

By way of contrast the current price rises and inflation arises purely from the post covid economic spasm and corporate profit which is rising at unprecedented levels. At the same time wages are falling everywhere and are contributing to rising prices at all.

These facts and the utter inability of any part of the left has to coherently explain any of the above - or build campaigns to challenge it - is one of the reasons why the working class ‘no longer exists as a cohesive social force’

Register to read | Financial Times

News, analysis and comment from the Financial Times, the worldʼs leading global business publication
www.ft.com www.ft.com

D9D844D8-6CFA-444D-972D-824A0C6BCE6D.jpeg
 
Meanwhile, Claire Green, from Miskin, Rhondda Cynon Taf, said she could no longer take the "risk" of being a landlord.
The single mum said she had already sold several of her properties.
She blamed the Renting Homes (Wales) Act for placing too much risk on landlords.
"There are a number of clauses coming in which could potentially send some people with a smaller portfolio like myself bankrupt," she said.
"A couple of properties, I was making very little profit on," she added. "I didn't feel confident enough to be continuing to self-manage and I just thought I can't do this anymore."
Click to expand...

www.bbc.co.uk

Cost of living: Landlords fear 'massive housing crisis'

New rules will push landlords into selling homes, leaving tenants facing higher rent, it is feared.
www.bbc.co.uk

1655321081471.png
 
How capitalism and the expectation of the markets forces a recession.

As the ONS Report shows, what was entirely predictable is now happening.

Rising prices - caused by record levels of corporate profit, the post covid economic re-restart and rising raw materials - are hammering demand. Put simply, ordinary people have stopped spending money because they haven’t go any. The first serious indicator is people stop buying food.

The Tory response to this is to launch a war against the organised working class with the demand of “wage restraint”.

But, of course, there is no wage-prices spiral and every economist on the planet has shown that wages have played no contributory role whatsoever in rising prices or inflation. In fact, if the aim is to prevent recession, then wages HAVE to rise now to create some demand and growth.

Whilst the political representatives of the ruling class fight a war against a non existent threat the Bank of England and the Treasury increase interest rates. Their rationale for this is based on one fact: it’s what the markets expect. They all know it will have zero effect on rising prices or inflation as spending is not the cause either.

Put the two approaches together and, hey presto, you’ve got a recession, adding business closures, redundancies, house repossessions and negative economic growth to the current mix.

 
Have a feeling things are actually going to kick off now.

There are countless numbers of the working poor who rely on food charity to make ends meet, and the spiralling inflation means ever greater numbers of people in work are struggling to survive.

If employers (and in the case of the public sector, the government) continue to refuse to raise wages while sitting on piles of cash, people are going to have no choice but to go on strike.

The government and the establishment talking heads don't seem to have gotten a cohesive narrative together. Telling people "pay increases will make inflation worse" is pretty unconvincing when you are barely paid enough to survive in the first place.

The summer strikes are likely a sign of things to come. When winter rolls round and people can't afford to heat their homes, things are surely going to escalate. Things have gone too far.
 
Rimbaud said:
Have a feeling things are actually going to kick off now.

There are countless numbers of the working poor who rely on food charity to make ends meet, and the spiralling inflation means ever greater numbers of people in work are struggling to survive.

If employers (and in the case of the public sector, the government) continue to refuse to raise wages while sitting on piles of cash, people are going to have no choice but to go on strike.

The government and the establishment talking heads don't seem to have gotten a cohesive narrative together. Telling people "pay increases will make inflation worse" is pretty unconvincing when you are barely paid enough to survive in the first place.

The summer strikes are likely a sign of things to come. When winter rolls round and people can't afford to heat their homes, things are surely going to escalate. Things have gone too far.
Click to expand...
I saw on the news yesterday that the use of food banks have gone but donations are down and some are running out of stock
 
Its high taxes that drive inflation. Business needs to pay the tax bill and this is passed on to the consumer. VAT is a good example. When I was at school it was less than 10% if I remember rightly - now the Tories have it at 20% - that paid for by the consumer.

ie if your welfare is £6000 a year - you'll loose 20% of via VAT. Admittedly its (so were told) not on all food stuff yet but they're pondering it.
 
Cado said:
Its high taxes that drive inflation. Business needs to pay the tax bill and this is passed on to the consumer. VAT is a good example. When I was at school it was less than 10% if I remember rightly - now the Tories have it at 20% - that paid for by the consumer.

ie if your welfare is £6000 a year - you'll loose 20% of via VAT. Admittedly its (so were told) not on all food stuff yet but they're pondering it.
Click to expand...
That’s a ludicrously reductive statement; tax in and of itself is essentially inflation neutral. Key variables like the proportion of direct to indirect tax, which income groups or assets are taxed and what is done with the revenue would need to be considered, but essentially taxation lowers effective demand and is traditionally seen as anti-inflationary.
 
Cado said:
Its high taxes that drive inflation. Business needs to pay the tax bill and this is passed on to the consumer. VAT is a good example. When I was at school it was less than 10% if I remember rightly - now the Tories have it at 20% - that paid for by the consumer.

ie if your welfare is £6000 a year - you'll loose 20% of via VAT. Admittedly its (so were told) not on all food stuff yet but they're pondering it.
Click to expand...

Inflation traditionally has been caused by a self-reinforcing feedback between price and wage increases – so-called wage-price spirals.

Changes in individual prices can broaden into aggregate inflation. And they can also erode real wages and profit margins for very long spells. But, ultimately, they cannot be self-sustaining without feedback between prices and wages: profit margins and real wages cannot fall indefinitely.

As for the causes of the current price - inflation crisis, I’ve specifically started this thread so that it can be discussed and understood because it does not follow that model. The current inflation crisis cannot be explained by using the traditional prices-wages model because wages have been falling for 30 years and continue to do so.

You’ve either not read the thread before posting or you’ve decided not to actually engage with it.

In the UK context we can actually examine data (from EPI and BIS) on what effect the current tax rates, that you say are too high, are having on the rampaging profiteering and price gouging of 350 biggest corporations in the UK (in case you need help understanding the data, the answer is ‘none’):

F28CD743-201C-42E6-8A09-8114EDFCC233.jpeg
 
This is excellent from Adam Tooze.

Key section:

But if inflationary pressures are now spreading, the reasons for this upward drift are telling. In 2021 and 2022, on both sides of the Atlantic, two factors have counted. One is the cost of inputs—raw materials and energy. The other is profit margins. Firms are taking advantage of the surge in demand to reap whatever advantage they can. What is missing is any sustained wage pressure. Wages in the United States have risen. But they have not kept up with prices. Real wages in early 2022 were below the upward trend they appeared to have been on before COVID-19 struck. In Europe, trade unions are beginning to make more significant claims. But there, too, wage growth has lagged behind prices.

What the facile 1970s analogy ignores is the basic shift in the balance of social forces. Whereas in the 1970s the response to inflation was strikes and loud demands for welfare state expansion, today the cost of living crisis is a matter of media reporting, Twitter campaigns, and philanthropic concern, not social protest or a workers’ struggle.

Full piece - which is required reading - is here:

foreignpolicy.com

The 1970s Weren’t What You Think

Yes, fiscal and monetary policy seemed stuck for too long in expansionary mode. But the era also saw the rebalancing of the world economy.
foreignpolicy.com foreignpolicy.com
 
McDonnell (and the economist’s who’ve signed the letter) are absolutely spot on. Price controls, clampdowns on excessive corporate profit, increasing wages and coverage of collective bargaining and taxing capital gains would have three immediate benefits:

1. It would dampen rising prices and inflation
2. It would protect millions of people from food and energy poverty
3. It would be massively popular - an election winner potentially if explained properly - and would create a set of ideas to organise around

If Starmer or Reeves had a clue they’ll steal these ideas and mention them in every interview possible and plaster it all over social media.

www.theguardian.com

John McDonnell calls for strict price controls on fuel and food basics

Former shadow chancellor says a radical response needed to the worst cost of living crisis in a generation
www.theguardian.com www.theguardian.com

The letter is here:

 
On the BBC news last night a reporter explained that McDonalds was ‘doing its best’ to absorb rising prices but ultimately had no option but to pass these on to its customers - who are all in receipt of below inflation pay rises if they are getting one at all. She’d probably make same explanation for energy companies.

Here are the latest profit figures from today:

- Centrica, owner of British gas, announces five fold increase in profits to £1.3billion in first half of year

- Shell's profits hit a new all time high of £9.4billion

- McDonalds profits $1.9billion for the last quarter. Annual profit forecast $5.5 Billion
 
Smokeandsteam said:
On the BBC news last night a reporter explained that McDonalds was ‘doing its best’ to absorb rising prices but ultimately had no option but to pass these on to its customers - who are all in receipt of below inflation pay rises if they are getting one at all. She’d probably make same explanation for energy companies.

- McDonalds profits $1.9billion for the last quarter. Annual profit forecast $5.5 Billion
Click to expand...

McDonalds sells 50 million burgers a day globally. A 30 cent price rise per burger e.g. the headline cheeseburger increase, totals $5.5 billion annually.
 
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