Thumbing through Crikey’s virtual pages, you could be forgiven for being confused about the cause of inflation. Maeve McGregor laid the blame for rocketing prices on cost-side pressures. Bernard Keane by contrast attributed inflation’s rise to nasty profiteering corporations increasing prices.
While McGregor and Keane are taking almost diametrically opposite views on the cause of inflation, both make little sense.
The cost-push claims are belied by data that shows cost pressures have largely reversed in the past year as inflation has rocketed. Most commodities have slumped to around pre-COVID levels: crude oil has dropped 38% off its peak, copper is down 25%, lumber is down 70%, and even natural gas, heavily impacted by the Ukraine war, is down 74%. Food prices, a critical input in inflation, fell 2.6% in May and are 22% below peak levels.
So, we can largely exclude cost-push as the major cause of Australia’s increasingly sticky inflation.
Keane was correct in a sense: some businesses are making the most of the situation and fattening profit margins. However, his complaint is more reflective of capitalism than inflation. Executives are tasked with maximising profits, which can be done in a number of ways: improving productivity, squeezing suppliers or charging customers more.
In normal times, unless they have a market monopoly, businesses that try to increase prices face a loss of market share as customers switch to competitors. But what has happened recently is businesses without monopoly pricing power have been able to increase prices without losing customers. The cause of this is obvious but exposes an inconvenient truth.
Following the global financial crisis, we saw a decade of gluttony where debt levels massively expanded on the back of moderated interest rates and fiscal spending. Then, in 2020, when the economy should have contracted, COVID came along and governments lost their collective minds.
Encouraged by much of the media, politicians globally (with a few exceptions) chose to lock up much of their populations. This had the immediate effect of significantly slowing economies and threatening mass unemployment and recession.
To avoid being voted out by the people whose jobs they destroyed, governments undertook the most aggressive fiscal stimulus in modern history. In Australia, more than $290 billion dollars was created (almost all funded by debt) and handed to all sorts of people, from those who weren’t able to work, to billionaires. The hundreds of billions of dollars that were created didn’t get returned when the pandemic ended; all that money remained in the system.
Most were in favour of the stimulus at the time. Keane himself noted the day JobKeeper was announced: “the sheer quantum of money this will push into the economy at a point where employment is collapsing and GDP is likely falling by double digits is the most important aspect, not design details. That will be crucial in softening the colossal blow our response to the virus is inflicting.” (To Keane’s credit, his views would later change.)
In April 2021, your writer suggested “JobKeeper is set to be the greatest head-fake in the history of Australian fiscal policy. A policy purporting to keep workers employed is likely to achieve two other things.
“First, it led to a massive transfer of wealth from future generations (the young and the not-yet-born) to wealthy baby boomers. Second, it created a swathe of businesses that should have been wiped out by a COVID recession but instead live on, in zombified form.”
Inflation in its most basic form is too much money chasing too few goods. The COVID-related stimulus created a torrent of cash and — unlike the previous decade of monetary and fiscal inducements (which largely went into skyrocketing asset prices like real estate) — materialised in higher consumer goods and services costs.
Corporations have been able to fatten their profit margins because their customers have more money to spend — that money came from extraordinary government stimulus during COVID. Demanding businesses not charge what customers are willing and able to pay is akin to telling homeowners they can’t increase the price of the property they are selling during a property boom.
If we’re looking for the cause of inflation, look no further than stimulus-loving governments and central banks, which dropped real interest rates to zero around the world. Blaming businesses for inflation is confusing a symptom with a cause.
Oh Adam, always good at making a splash.
I don’t think anyone questions the negative effects of loose monetary policy during (and long before) Covid, which has contributed massively to the current high inflation.
It is unquestionably the main cause of the current situation.
The discussion initiated by Keane and McGregor is simply the RBA’s illogical fairy tale of the wage-price spiral. Interestingly, this narrative continues to be replayed ad nauseam, even though “out of control” wage rises have never occurred. Apparently, just thinking about it was enough to cause inflation!
I really laughed at the idea of “demanding businesses not charge what customers are willing and able to pay…” Where does “willing and able to pay” come into play when I have to fill my tank to drive to work, buy groceries for my family, pay utility bills, or purchase building materials to progress with a house build for which I have already signed the contract and mortgage?
And then there’s the claim that “corporations have been able to fatten their profit margins because their customers have more money to spend…” Really?
No! Corporations have been able to fatten their profit margins because they were able to unscrupulously and unchallenged exploit their monopolistic market position.
It’s beyond rationality to argue that giving money to workers causes inflation, while giving much more money to shareholders does not affect inflation at all.
What a load of…!
Yes, ‘demanding businesses not charge what customers are willing and able to pay’ surely only applies to luxury or non-essential goods and services and those who can afford them, and ignores the need of many to go into debt to obtain even the essentials of life, shelter and food. Businesses and property-lords just pass on any increased costs, such as interest rates, in order to maintain income or profit margins, but the wage-earners whose stagnant wages are relentlessly losing their percentage share of the magical pie can’t pass anything on.
Sweeper, in support of your comment, I drove pas the petrol station near my house two days ago, they were advertising prices $2.07 per litre. Today it was $1.86 per litre. Oh, I forgot to mention there are two petrol stations facing off on the same street corner. Guess what, they both had the same price, both days. And of course the petrol in the underground tank is THE SAME PETROL THAT WAS THERE ON WEDNESDAY. The price has nothing to do with competition, & nothing to do with what people are ‘prepared to pay’. Any simple minded economists here (I’m talking about you Adam S) who can explain the price of petrol and how it relates to your grand ideas on inflation? (disclaimer, I used to work for an oil company so I actually know quite a lot about their price structure).
You’re not entirely wrong, but at the same time the analysis is at best superficial. The problem are far bigger than just a particular government or central bank at any point in time. The entire neo-liberal economic framework and its accordant requirement for hyper consumerism is ultimately destroying civilisation.
At the centre of this is the Idea that wealth can be had for nothing.
This has made dupes of the very people whose intellectual endeavour, labour and philosophical frame of reference has been bent to the purposes of those who have most to gain from a compliantly greedy and self-interested populace. From paupers to Presidents.
And thus our institutions cough up each generation after generation, legions of earnest, ambitious, jejune, young men and women who channel their energies to making a living from the buying and selling of other people’s enterprise. Who inhabit the neon-lit hyper non-reality of a global casino, their eyes unable to adjust to natural light. Who blow bubbles. Who create nothing of substance. Shallow, hollow men and women.
Gilded eunuchs of the free market who dig themselves further and further into that ideological mire where all that matters is expanding your power to consume and dictate the terms of your own life independent of the constraints with which most ordinary working people must contend.
And why wouldn’t you ? Who wants to struggle ? To eke out a living ? But ultimately, this ideology of living a lifestyle built on unearned wealth is a fantasy. The West has been living a fantasy of asset speculation and hyper-consumption, which should have been definitively brought to a halt in the early 90s, 2009 and again in 2021.
Public squares should have been adorned with the hanging bodies of media moguls, politicians, CEOs, central bankers, chief investment officers, investment bankers, derivatives traders, consultants, economists, pension trustees, land valuers, real estate agents, financiers, mortgage brokers, boutique cupcake retailers, and every affiliated crony enterprise.
Instead each generation of cronies are shuffled off quietly to continue their capitalist, survivalist idyll in splendid architecturally designed houses in the various secluded enclaves preferred by modern robber barons. Nothing less than the abandonment of neoliberalism and its lies, its false reality, the spurning of this twisted economic ideology, can restore humanity to its higher purpose.
So well written. Thank you
Marvellous comment!
I wonder if Schwab has read Bernard Keane’s article today on wage theft, right next to his own on the main page. Big corporates including universities waging (excuse the pun) their own private war on the evil ‘inflation’!
Thank you for reminding me that the only thing about economics that vaguely made sense during my uni days, is Marxian economics. It’s amazing that so much of today’s world seems to be driven by the simplistic fantasies of neo-classical economics.
Thanks for this comment, it captures so much. As of late I’ve turned to Michael Hudson, who has so much to say about unearned wealth and the rent-seeking class – he’s brought so much into focus for me and in Killing the Host, he demonstrates the parasitism of the FIRE sector’s (Finance, Insurance, Real Estate) relation to what might otherwise be a more productive economy. I couldn’t help but notice that the bodies adorning the public square you mentioned all come from the FIRE sector. Anyways, thanks again.
“The cost-push claims are belied by data that shows cost pressures have largely reversed in the past year as inflation has rocketed. Most commodities have slumped to around pre-COVID levels: crude oil has dropped 38% off its peak, copper is down 25%, lumber is down 70%, and even natural gas, heavily impacted by the Ukraine war, is down 74%. Food prices, a critical input in inflation, fell 2.6% in May and are 22% below peak levels.”
These are costs as measured by trade or commodity prices as an index. In other words they are basically raw, wholesale prices. They are not the prices passed on to consumers and businesses in the so-called market. The use of these is misleading and I wonder how accurate they are in any case because when the last time Mr Schwab was on Crikey, he mentioned oil prices dropping a massive 34% after the first oil shock. This may be true but only after oil prices initially rose 120%. Meaning oil prices settled down in 1974 late to $9/barrel after starting out 1973 at $3/barrel. I hope his use of these figures is not similarly misleading. I have yet to see evidence of these decreases in input costs and prices for commodities passed on. Millions have a lot riding on it and so does Treasury, the RBA and the Federal Government.
I came here to say the same thing.
Well said.
Global oil down, but petrol up and other items are rising. Come on!
As a physics / science person this kind of post (the op, not your reply!) drives me nuts. There is no real quantitative analysis. Increasing wages will drive inflation, yes. Companies bumping prices will also drive inflation, yes. Increasing money supply will drive inflation, yes. but can anyone do some simple maths using govt published statistics to tell us which tendency is dominant? Can’t be that hard.
Keeping people alive while you’re stopping them from working should not, I think, be described in the derogatory terms you used. Yes, inflation and growing wealth concentration was the predictable aftermath. But surely the fault then was failure of the government to claw all that excess cash back out of the system in ways that targetted the places where it ended up (the resources and finance coportations, large retailers, and high income earners) and use the tax income obtained to do public enterprise which functions to reduce costs, reducing health, child- and aged-care costs and rent by state intervention. Instead they are leaving the Federal Reserve Bank to use the only instrument they have to extract the excess cash from home-buyers and other borrowers alone?
Shh, Adam is still upset that his tourism business got hurt by lockdowns. That automatically makes every claim he makes about Covid & its aftermath totally suspect.
To quote
SatanScott Morrison when asked if the wealthy should pay back Jobkeeper: ‘I am not interested in the politics of envy.’On a different keel, I kind of like Schwab’s articles, not so much for their content, but for the replies that contradict them.
Hear hear. The cash splash was 50% a good idea (the liberals f’d it up of course) but there was no followup management of the money supply.
And in the same way, the cause of the shark attack fatality wasn’t the shark, it was because the victim was stupid enough to jump off the burning ship into the water.
Cos sharks gotta do what sharks gotta do, ya know.
Got it!