I’ve seen texts written by progressive economist on the sources of inflation being driven by supply side issues and not because of demand-pull (wages). They’d be correct!
Their articles detail how rises in rates won’t assist with prices rising from supply side issues. However, one ended by stating the RBA needs to be clear why it is hiking rates and it is for financial system stability. There are issues with the way they are thinking about inflation and the role interest rates play in our society.
Inflation is viewed in terms of rising prices and economic instability. The raising of rates is supposed to ‘cool’ down the rate of inflation. It is often juxtaposed within a context of rising housing costs as the commercial banks often increase their mortgage rates by the same amount. Rising rates are supposed to mean subdued house price growth. Low rates over the last decade have been seen as abnormal which has sometimes been interpreted as one reason for our current high housing costs and a contribution to our inflationary problem. The reality (I think) is very different. The fact that the cost of housing is so entrenched in the public discourse and tied to the cash rate rises makes it difficult for regular people to seperate the two concepts and seek alternate policy for what can be done about rising prices (and housing). There isn’t a level of ‘normal’ rates that needs returning to; nor is there a particular cash rate needed to create some sort of ‘system stability’.
Inflation needs to be viewed by more than just rising prices. It is a conflict between labour and capital over national income. Pat Devine penned Inflation and Marxist Theory, in Marxist Today, 1974 describing inflation as a conflict over competition resources.
Competing Claims on Real ResourcesInflation and Marxist Theory, Marxist Today, 1974, p.84
Thus, whether through trade price effects on the real wage, through the influence of international competition on the extent to which cost increases can be passed on or through international influences on aspirations for higher real wages, the international character of the capitalist system impinges on the struggle between capital and labour—the fundamental cause in post-war conditions of chronic inflation.
I stated in my previous post that we couldn’t know what the net outcomes of the distributional changes of a rise in the cash rate would be. Businesses who have borrowed to fund capital may pass on increasing cost to consumers, we also see an increase to those holders of government debt, as consumers cutback to service increase mortgage costs. So as to whether an increase is deflationary is circumspect.
Today we discuss inflation within a framework where it is the responsibility of the Central Bank to target a particular inflation range.(2-3%) The tool used to do that is monetary policy (interest rates). Historically central banks have not targeted an inflation rate.
In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of monetary policy
- the fixed exchange rate period, which lasted until the early 1970s;
- a period of monetary targeting between 1976 and 1985;
- a transitional period which followed the demise of monetary targeting and lasted until the early 1990s; and
- the inflation targeting regime, in place since around 1993.
The first point shows the first regime was to ensure an exchange rate parity
“As was the case for most other countries, the Bretton Woods System of ‘fixed but adjustable’ exchange rates was operated in practice in Australia in the 1950s and 1960s as a firm commitment to fixed parities. The fixed exchange rate was effectively the linchpin of the monetary policy regime.”https://www.rba.gov.au/speeches/1997/sp-gov-290997.html
The rate wasn’t altered because inflation was deemed ‘excessive’ rather there was a concrete goal that the exchange rate between the $AUD and $USD should remain at a particular parity. The particular ‘inflation targeting’ we see today evolved from the 1970s oil shocks that sent inflation and unemployment to high levels as the Post-Keynesian framework couldn’t offer a solution.
Devine summaries the monetarist theories that would eventually gain hold of the economics profession.
Monetarist TheoriesInflation and Marxist Theory, Marxist Today, 1974, p.87
“Most recently at the theoretical level there has been a vigorous offensive by some neo-classicals in the form of monetarism, receiving its impetus from the self-evident demise of the stable short-run
Phillips Curve relationship. An attempt has been unconsciously and influenced by what has become made to salvage the role of excess demand, in the traditional form of a long-run vertical “Phillips Curve” at a “natural” rate of unemployment, by introducing expectations, with the policy implication of the need to stabilise expectations by pursuing strictly a widely-publicised course of expanding the money supply at a rate equal to that of estimated long-run productivity growth. The ideological function of bourgeois economic theory, especially neo-classical theory, is seen here at its clearest.
The attribution of the cause of inflation to asocial abstractions like the money supply, or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “cured” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses.”
Devine was discussing the idea that monetarist believe it is the money supply that caused inflation and their solutions ignored that rising prices also meant a rising income of those charging higher prices. If the costs of goods and services increase, the labouring class would use their power to combat the rise in those prices. Monetarism was successful in its approach in taking over the profession and using its methodology to combat inflation, rising unemployment. The NZ film In a Land of Plenty provides what happened when the NZ government abandoned its role in providing full employment and targeted inflation as a goal.
Those same flawed arguments rare used today. It is assumed the raising rates will ‘cool’ spending, despite the issues not arising as a result of wage pressures (and despite commentary to the contrary) Arguments today ignore tend to ignore social conflict taking place. It is the price setting power that firms hold that sees increasing costs being able to be passed on. Today the labouring class doesn’t hold the power to ‘fight back’ as union laws have been constructed to limit bargains power and densities are at their lowest points since the post-war boom.
I am in day four of my covid isolation, trapped in a hotel room. I came across this tune I’d forgotten about. I’ve always been a fan of 1950s Jazz and the wonderfull Ella Fitzgerald. I was watching a film (that isn’t worth mentioning in) but it had a remake of the song ‘They all Laughed’ and I was reminded of the Ella and Louis version.