Tuesday, November 13, 2007

Inevitable Inflation?

The new inflation goes beyond all markets, turning them into art forms or play grounds for economic playboys. - Marshall McLuhan, 1974
If food, fuel and housing are all increasing in price, why isn't it called inflation?

The Consumer Price Index (CPI) compiled by the US Bureau of Labor Statistics (BLS) measures these things, but inflation figures are usually reported as excluding costs of essentials, such as food and fuel.

The CPI uses a fixed-weight Laspeyres index to determine prices changes over time, with the base period reseting every two years (more on the CPI index). The scope the CPI measures is the price of a "basket" of goods purchased by a typical "urban" consumer. Items included in the CPI fall into a number of categories including food, housing appeal, transportation, and medical, among others (CPI Q&A).

We know that fuel, education and medical costs have been skyrocketing in recent decades, at the same time that inflation is supposedly staying at 2-3% per year. This has justified keeping wages stagnant for the majority of workers. Why the statistical disconnect?

The answer is that, since 2000, the Federal Reserve system (the Fed) consistently focuses on something called the core-CPI or the CPIX (also core inflation, core index, or core rate). CPIX is a price index which excludes certain items, such as food and fuel.

According to the Federal Reserve Bank of Cleveland, core-CPI is measured as:
CPI excluding food and energy. The most commonly used measure of core inflation is the CPI excluding food and energy, published by the BLS. [The term "core CPI" is often used to refer to this measure.] This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile. More specifically, food and energy prices are widely thought to be subject to large changes that often fail to persist and frequently represent relative price changes.

Cleveland Fed
So the idea is that, there are many ways to measure CPI, and the Fed has picked one that paints the rosiest picture for capitalists. The problem is that it is an incomplete picture which does not reflect reality. Even worse, this neoliberal econometric mechanism has been foisted onto all of the other major economies, including China and the Eurozone, in recent years.

The net effect has been a distortion of the money supply at an unprecedented level in history, which has led to the biggest credit bubble, in terms of capital and breadth, of all time.

What are the results?
In China, consumer price inflation in October reached 6.5%, matching the 11-year highs tapped in August, as the cost of staples foods such as pork and vegetables vaulted.

Pork prices jumped 55%, and vegetable prices surged 30% after a 12% gain during September.

The data are expected to spur further action from Beijing to rein in spiraling prices.

Analysts speculated a further tightening could be imminent, with Beijing poised to lift interest rates for a sixth time this year after the data's release. China's central bank lifted the reserve-requirement ratio for banks for a ninth time this year on Saturday in an attempt to cool lending growth.

"Today's CPI release is likely to persuade the government to closely monitor prices and, in our view, supports our forecast that the PBoC will raise the benchmark one-year lending and deposit rates in the near term," said Yan Zheng, an economist at Barclays Capital, in a note to clients.

Credit Suisse economist Dong Tao added persistently high food prices were a particular worry for the authorities because they signaled broad-based inflationary pressures may be taking hold throughout the economy.

"If the cost of food at the dinner table continues to hold at high levels, people will demand higher wages," Tao added.

English breakfast, mou-shou, baguette prices rise. Market Watch. 13-Nov-2007.
From Marxists.org:
Inflation is the situation wherein the prices of all commodities of whatever kind are subject to a steady and more or less uniform increase in price over time. The term dates from 1838.

Given that price expresses the ratio between a given quantity of a commodity and its equivalent in money, it is self-evident that inflation manifests the falling value of money, rather than the increasing value of all other commodities. Thus, the reasons underlying inflation need to be sought in factors which may be undermining the value of money.
In Capital (Vol I, Chapter 25) Marx discusses inflation and its relationship to the crisis of capital.
Thus, when the industrial cycle is in the phase of crisis, a general fall in the price of commodities is expressed as a rise in the value of money, and, in the phase of prosperity, a general rise in the price of commodities, as a fall in the value of money. The so-called currency school concludes from this that with high prices too much, with low prices too little money is in circulation. Their ignorance and complete misunderstanding of facts are worthily paralleled by the economists, who interpret the above phenomena of accumulation by saying that there are now too few, now too many wage-labourers. Marx, Karl. Capital, Volume I, Chapter 25. 1867.
Inflation has always been blamed by classical economics on the increase of workers wages. The logic being that, the more workers get paid, the more money is in the system, and therefore the less value the currency has vis-a-vis goods and services.

However, history has shown that in fact repeated financial bubbles lead to crisis in capital through boom-and-bust cycles which are the prime drivers of inflation. Again, from Marxists.org:
The most common cause of the loss of value of money is the creation of “Fictitious capital”, i.e., the creation of money or credit exchangeable for money without the creation of commensurate value in the form of goods and services, thus undermining the value of all forms of money and credit: for example, the excessive printing of paper money by the government to finance public works, the creation of fictitious value by banks through unsecured loans, the declining exchange rate of a country's currency, causing prices of all imports to increase, and so forth.
Does this sound familiar? Does this sound like a good description of what has been happening in our economy? First the dot.com fueled stock market bubble, then the housing fueled mortgage crisis credit bubble, both examples of "fictitious capital."

Clearly workers wage increases are not to blame for inflationary economic cycles. It is inherent in the crisis prone capitalist system. The increasing financialization of capital only exacerbates and intensifies the crises.

The greed based capitalist economic system must be replaced by a rational system based on sound principles designed to meet human needs. A move towards 21st century socialism is required to face the challenges of the future and to reverse the ravages of capital.

What other bloggers are saying about core-CPI:

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