What Causes Inflation?

“We understand better now how little we understand about inflation,”[i] commented Jerome Powell, Chair of the US Federal Reserve (the Fed), when inflation reached its highest level since the late 1970s in 2022. At the same time, the Governor of the Bank of England (BoE) admitted that they are unable to control what he called the “apocalyptic”[ii] rise of food inflation. Similar helplessness has been expressed by central banks around the world.

Today, with some exceptions, the majority of countries do not have the so-called ‘Goldilocks’ inflation rate that ranges around 2%[iii]. The rise in high prices and the unavailability of commodities have further deteriorated living conditions in numerous neocolonial countries. Advanced economies are not excepted. According to 2022 data from the UK government, “over two-thirds (69%) of 29 countries have ‘high’ or ‘very high’ inflation compared with their 50-year trends.”[iv]

What caused the inflation?

There are two prominent arguments usually given by bourgeois economists for the cause of inflation. One argument is that inflation is caused by wage increases coupled with supply and demand problems. The other argument is that inflation is seen merely as a monetary phenomenon linked to the amount of money in circulation.

For a long period, mainstream capitalists maintained that inflation is caused by problems in the supply of commodities. Additionally, they argued that the rise in wages and the drop in unemployment contributed to inflation. They argued that an increase in the cost of production due to changes in the labour market would be passed on to the market in terms of price rises (Economist William Phillips used UK data available until the late 1950s to demonstrate an inverse relationship between wages and unemployment. This concept came to be known as the Phillips Curve. Over time, this idea evolved to suggest that there is also a proportional relationship between prices and wages. Using this framework, capitalist economists argued for a significant period that in order to lower prices, unemployment must increase alongside wage reductions).

Though Karl Marx in his writings and Marxists since have challenged this view, mainstream capitalists were only forced to acknowledge this view during and after the great inflation period (1965-82). Neoliberal economists at that time proposed fundamental changes to monetary policies, arguing that inflation should only be linked to money supply in the market. Milton Friedman, who led the ‘Chicago School’ of neoliberal economists, summarised inflation as “always and everywhere a monetary problem”[v]. He argued that inflation is simply caused by “too much money chasing too few goods”[vi] (so called demand-pull inflation). To this day, the monetary policies of all capitalist governments are influenced by the ideas that emerged in that period. Today, some admit that inflation is a complex phenomenon influenced by a range of factors such as fiscal policy, supply and demand dynamics, external shocks, and so on.

But the crisis in the 1970s exposed the lie of the wage-price spiral. Even when the IMF’s recent research admitted that there is no substantial data available to support the wage-price spiral[vii], capitalist economists did not fundamentally change their position. They still argue that, at least in the short run, there has to be an increase in unemployment, wage cuts, etc., which they claim are ‘side effects’ of ‘temporary measures’ to fix the inflation problem. The “full employment” threshold could limit the output while demand rising, is the rationale behind this.

Now, of course, none of the capitalist governments or central banks blame the market or accept responsibility for the current apparent ‘sudden’ emergence of the inflationary crisis.

Some just blame the Covid pandemic and the war in Ukraine as the main causes of the crisis[viii]. Putin, Xi Jinping, and the Covid-19 virus are the main culprits! In addition, there is a debate amongst capitalist economists over the effects of Quantitative Easing (QE) in causing inflation. The Bank of England governor, on the one hand, claims it should not be blamed but at the same time admits that there are “big lessons to be learned.”[ix] This is an indirect admission of their inability and failure. Inflation is not strictly a monetary phenomenon, but monetary policies can, however, be part of the cause. From the bourgeois economist’s point of view, their past policies worked well, but their only fault is that they were not well-prepared for the ‘shocks’, which they claim were not their doing. But they overlook the fact that most central banks in recent times used money supply as a means of attempting to solve all sorts of economic crises.

Panic-stricken capitalists at the emergence of the global economic crisis in 2007-08 wasted no time in mounting a “rescue” operation, which was summarised as “privatising profits and socialising losses.” The Obama administration in the US that took office in 2009 wasted no time in allocating $700 billion of public money to rescue and subsidise failing companies. The Guardian reported how quickly Gordon Brown, the then UK Prime Minister acted, quoting senior politicians: “Gordon was prepared to say, ‘We need to bail them out,’ despite the political risks.” Approximately £37 billion of public money was made freely available immediately to the banks and finance companies to supposedly save the economy from “imminent collapse.”[x] Hence began the era of ‘easy money’, otherwise known as Quantitative Easing.

According to the American think tank the Atlantic Council, the Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England have together already used over $25 trillion of public money for QE. In the pandemic year alone, over $9 trillion is claimed to have been spent[xi]. When the economy was shut down, various subsidy measures carried out such as furlough schemes and cash handouts and so on may have increased savings for a section of workers in the advanced economic countries [xii]. But a significant proportion was made available to businesses. In general, the quantity of money made available is the highest in history.

The public was burdened with it in the form of government debt, but to this day, there is no clear report that shows exactly how much money internationally was used for QE or how it was handed out to the capitalists. So much for capitalist transparency! From the available government data, it is evident that the UK government has allocated up to £410 billion to furlough schemes alone[xiii]. A significant portion of this amount, £150 billion, has been provided to businesses to subsidise their losses. The expenditure on workers’ wages and individual assistance ranged from £55 billion to £70 billion. However, workers experienced a 20% wage reduction since the UK government, on average, covered 60% of their wages, while employers contributed only 20%[xiv]. Many firms that benefited from this scheme have continued their operations with employees working full-time from home. For instance, gambling company Ladbrokes capitalised on the online betting boom during this period to generate substantial profits and has so far refused to repay the £102 million government handout it received[xv].

Despite instances of various frauds and mishandling of funds by political parties and their capitalist allies[xvi], the middle class was able to accumulate moderate savings, attributed in part to reduced travel and leisure activities. It is important to note that this phenomenon is not widespread but rather specific to a handful of developed economies. In the US, approximately $1.8 trillion was allocated for individuals and $1.7 trillion for business rescue (total spending approaching $5 trillion)[xvii]. The reopening of economies resulted in a surge in demand, influenced in part by the moderate savings accrued during this period. However, this amount constitutes a relatively small portion of the overall money supply.

Not all the money is ‘printed’ or handed out to workers to put into market circulation for commodity exchange; instead, it finds its way into the hands of the biggest banks, monopolies, and a small percentage of other capitalists, particularly through state purchase of assets and businesses that are losing value and profit. In effect, the losses of greedy capitalists are replenished by purchasing them with public money. This is partly done through the creation of additional money by central banks via the provision of loans. The money was advanced, but it did not end up in circulation or in the hands of consumers as hard cash. Most modern central banks create money as electronic deposits rather than printing. The Bank of England, for example, creates only 3% of the money as coins and paper money[xviii]. The lack of full transparency of the electronic transactions between top banks and central banks makes it impossible for an external observer to decide what proportion is actually going to the consumer and what proportion is still with the top banks, what proportion is increased accumulation of capital, and so on. Researchers are forced to depend on general data that are made available. But we could safely say that the so-called ‘helicopter money’ that was handed out to consumers in advanced economies is small in comparison and mainly relevant to economically developed countries.

This biggest robbery in human history – the biggest transfer of wealth from the public to a tiny percentage of capitalists – was carried out in complete silence. Workers and sections of the middle class who have been losing their money had no say in it.

Additionally, the interest rate for borrowing was enormously reduced, enabling huge amounts to be borrowed. This nonstop availability of money created so-called ‘market confidence’, consequently leading to more speculation and an increase in risk-taking.

Furthermore, the so-called supply-chain ‘shocks’ that capitalist economists talk about are not randomly occurring but a consequence of the capitalist system. As a result of the economic crisis and rising international tensions, there has been an increased tendency to retreat capital within the boundaries of the nation state, as well as competition to control key resources, production hubs, supply routes, and the supply of key commodities. A reduction in world trade growth and the features of deglobalisation have emerged. Protective actions by the main capitalist states have also further aided this process. For example, the US’s Chip and Science Act enormously restricted the free flow of microchip supplies, which is a key commodity in the world. Geopolitical tensions resulting from the economic crises have given rise to various sanctions, conflicts, and proxy wars that obviously impact the supply side of the market.

This is taking place at the same time as key developed economies are faced with a lack of investment in the real economy and falling real wages. Due to geopolitical tensions, state investment has also concentrated more on the non-productive sector. (While substantial subsidies are currently being provided in countries like the US to enhance localised manufacturing[xix], these efforts do not necessarily result in an immediate surge in manufacturing activity. Instead, they are part of a long-term strategy spanning decades, aimed at establishing essential manufacturing capabilities within national borders.)

The compound result has been the intensification of the economic crisis in general. The debt bubble has further inflated, hoarding by super-capitalists has increased, and workers’ ability to buy commodities has diminished. The development of the monetary crisis has not been a single act but is connected to the general economic crisis of capitalism. The various aspects outlined above do not operate in isolation; rather, they contribute to one another, ultimately highlighting the fundamental problems inherent in the capitalist system. The shortage of demand played a role in the crisis that emerged in 2007 and 2008 and continues to be an aspect of the ongoing crisis. The reluctance of capitalists to reinvest in production and the enhancement of a substantial credit bubble were consequences of this factor – namely, the characteristics of the crisis of overproduction. It is important to note that this did not lead to a reduction in prices and broader bankruptcies in the preceding period. Instead, measures like QE and economic slowdowns were seen as attempts to balance the system. However, these and other strategies have ultimately exacerbated supply-related issues rather than resolving them. Even the remedy proposed by capitalists eventually adds to the crisis rather than coming anywhere near to fundamentally solving it. No solution can be found within the framework of capitalism. The Marxist understanding of money, price, and wages is different from that of right-wing economists.

How do Marxists explain it?

The writings of Marx, written over a century ago, provided clarity on the capitalist economy for the first time since its birth. While Marxists (those who use the writings and understanding developed by Marx) don’t claim to have the ‘full knowledge’ and explanation for every chaotic capitalist market relation, they do have clarity on the fundamental relations and laws of capitalism.

One of the key contributions of Marx was showing what creates value for all commodities. The socially necessary labour required for producing a commodity not only adds to the value of the commodity but is also solely responsible for creating surplus value[xx] − (and profit). However, the price of a commodity is not a direct equivalent to the value added during its production. Rather, the price oscillates above or below the value added in production. This fluctuation is linked to the relative value of commodities, which emerges in the process of exchange[1]. Money commodity while having its own value, also expresses the relative value of other commodities in circulation.

It’s important to note that this relative form represents social labour and is connected to the rest of the commodities in circulation. While representing the relative value of a commodity, money also simultaneously represents the value of money itself (e.g., the gold commodity). If the value of gold drops, it may be due to an increase in its availability in circulation. However, fluctuations in the value of money itself will not automatically result in a change in price, as the value of commodities may change differently, though fiat money (currency not backed by gold) changes differently.

The price of a commodity can change for a number of reasons, mostly due to a combination of various factors such as the reduction in the value of money, the quantity of money in circulation, changes in the cost of production, and changes and distortion in supply and demand, capitalist greed-price fixing.

Can the quantity of money itself be a singular factor in changing prices? All else being equal, the total amount of money needed for circulation could be determined by adding up the prices of all commodities. The total available money, or quantity of money, can then impact the value of money. For example, an increase in quantity can decrease its value, subsequently raising prices. In other words, the quantity of money is directly proportional to the price. However, the total amount of money needed will be less if the velocity of money (the total transactions that money makes in a given time) increases. Slowing down money circulation can also increase prices. The higher the velocity, the less total amount needed. In that sense, inflation is also connected to the total money in circulation and its velocity. (This is more the case in the past period when the gold standard existed, where money was pegged against gold. Fiat money is not backed by any other real commodity and subsequently, its availability does not necessarily automatically devalue the currency).

However, it is not the total amount of money in circulation that always determines price. For example, a rise in the value of the dollar will not automatically result in a rise in prices in general. (It is worth remarking again here that the value of money [which can change due to its quantity] is different to that of value of commodity it represents). Changes in commodity prices are fundamentally linked to the value of the commodity created during its production (not just raw material needed for production). Even if the quantity of money is kept constant, changes in production costs can impact prices. Adjustments in supply and demand and production costs can maintain low prices even if the quantity of money increases substantially. Hence, it is wrong to assume that inflation is a simple monetary phenomenon. As we saw above, monetary developments, while impacting prices, are not reducible to the quantity of money alone.

Does this mean that the state resorting to the printing press is irrelevant to inflation? No. It can also be a factor and relevant to inflation. But the availability of money alone cannot solve supply/debt crises or any other crisis arising from the inner contradictions of capitalism. As we saw above, making more money available will exacerbate the price rise, after time delay, rather than solve it. Proponents of ‘Modern Monetary Theory’ (MMT) argue, in general, for the ‘power of the purse’ to be put into action in times of crisis, regardless of budget deficits or inflating debt. MMT proponents do not have their own fully worked-out model of what causes inflation; their key difference with other economists lies in the way they propose solving or preventing inflation.

Generally, the main critique levelled against MMT is the argument that it ignores the danger of inflation by advocating an increase in the money supply. However, MMT economists, in general, do not disagree with the post-Keynesian approach to what causes inflation. Warren Mosler, a key proponent of MMT, argues that “state spending sets the terms of exchange; the price level is a function of prices paid by the state when it spends.”[xxi] Stephanie Kelton dedicates a whole chapter to inflation in her book ‘The Deficit Myth,’ listing several possible scenarios that could cause inflation, including ‘Acts of God’ (natural disasters, such as drought, that could devastate the availability of key commodities), workers gaining more bargaining power and increasing wages, monopolies setting prices, people spending faster than what the economy can offer[xxii]. She also acknowledges that an increase in the money supply can cause inflation, stating that “there are real limits to spending, and attempting to push beyond those limits can result in excessive inflation.”[xxiii]

The only reason that the massive QE from 2009 did not produce inflation, according to Kelton, is that the Great Recession resulted in millions unemployed and businesses operating below productive levels. In her view, pumping money (like QE) only leads to inflation when employment reaches the threshold of ‘full employment’ (bourgeois economists argue that this means that the level of employment where no additional employment can be created – leading to rising wages and subsequently increasing the cost of production. Of course, they conveniently ignore the class struggle over the division of surplus value). Many economically developed countries use the idea of a natural rate of employment introduced by Milton Friedman, often referred to as the Non-Accelerating Inflation Rate of Unemployment (NAIRU), which can vary from 5% to 8%. (The Fed has admitted a few times that they have overestimated this level.)

Once that bottleneck in terms of unemployment is reached, Kelton says, “Any additional spending, not just government spending, will be inflationary.”[xxiv] While fundamentally agreeing on the cause of inflation with other economists, Kelton and other MMT proponents argue that full employment and controlling prices are possible. She proposes a ‘fix’ to capitalism and its boom-bust cycle by providing a ‘cushion’ to make “downturns less severe and recovery arrive sooner”[xxv].

After making a valid critique of the Fed for continuously adjusting monetary policies to maintain the unemployment rate at the NAIRU level, Kelton ventures into utopianism. While the Fed claims to have a more powerful wand than that of Voldemort, Kelton extends an invitation to the land of Oz. Instead of adjusting interest rates, she suggests adjusting taxes (including introducing corporate taxes, apparently “not to fund government expenditure, but to help rebalance the distribution of wealth and income”[xxvi]). She argues for sustaining fiscal deficits over a long period, implementing a federal job guarantee to eradicate involuntary unemployment, introducing a universal minimum income, fixing hourly wages, implementing wage floor controls, handling all of this in a decentralised way, and, of course, asserting that all of this does not need to strain the budget of Uncle Sam because “he can’t run out of money”.[xxvii] This is impossible to maintain in a capitalist economy. Nowhere does she mention the need for nationalisation or workers’ control. The idea that capitalism would voluntarily allow job guarantees for all, for example, is a utopian idea, as is the idea that the world market would not punish any government that attempted to introduce such measures.

The MMT’s complete misunderstanding of the origin and nature of money, and its connection to capitalist relations contributes to their confused views. Power of argument will not fix capitalism. For all these economists, the so-called ‘demand-pull’ theory (where there is an excess of money chasing a limited supply of goods, especially when the economy nears full employment) serves as the primary explanation for inflation. None of them have fundamentally departed from classical economists who sought to establish a connection between wages and prices.

Price is not a constant entity but fluctuates due to various factors, some of which were outlined above. However, a monetary crisis develops when these factors become prominent. In a different example, if the interval between selling and purchasing widens too much and becomes too pronounced, it can produce a crisis, as Marx pointed out: “The intimate connection between them, their oneness, asserts itself by producing – a crisis.”[xxviii] We can see a number of factors present in the current global economic crisis. It is not a single factor, but a combination of these factors that contribute to the inflation and current monetary crisis in general. Slowing down circulation, increased money supply, breakdown in supply, and so on are some contributing factors. Monetary crises are often part of or side effects of the general crisis of capitalism. Though recent supply chain ‘shocks’ have played a role in accelerating the nature of the monetary crisis, the foundation for that was already present even before these so-called shocks materialised. Bourgeois economists defending themselves by blaming unpredictable supply shocks is a bogus argument. Since the Great Depression, every monetary policy was supposed to include tools to deal with supply shocks. In reality, bourgeois economists are never prepared for any capitalist crisis; rather, the main focus has always been to maximise profit. The man who is sometimes dubbed as the person who single-handedly saved capitalism, Gordon Brown, famously claimed that the “boom and bust cycle” of capitalism had ended. Only when the crisis developed in 2008 did he come to the understanding that he understood nothing. He then transformed himself from a man of economics to Mr. Truth, claiming, “Yes. Of course, politicians make mistakes, and I’ve got to be honest that we’ve made mistakes.”[xxix] Nowhere are they able to properly explain what actually causes the crisis. During times of crisis, many return to Karl Marx – whose writings remain the only source of the method needed to explain the crisis-ridden system, even centuries after they were written. As the economy fell, Marx’s book sales rose (of course at a high price!).

It is also wrong to assume that prices are determined solely by some unknown law that governs demand, supply, or the production process alone (although prices do oscillate based on the value created at the point of production). Prices can also be arbitrarily fixed. Even natural resources or things that are not produced through human labour can be given a price. Objects may have a price without having value. Greedy capitalists often do use whenever they can, the crisis period and high inflation to make more profit by arbitrarily fixing prices.

Given the rise of huge monopolies, particularly in the tech sector, and the powerful grip that some massive supermarket chains have on food producers and supply mechanisms, the question arises: are they not fixing prices just to accumulate more cash? Even when the cost of production remains low, those who have control of the supply of particular commodities can fix prices. What is sometimes called a price-price spiral or ‘greedflation’ is part of every inflationary period. Capitalists do more than fiddle – they conduct an orchestra while Rome burns.

How inflation is measured is another factor that plays a part in cooking up wrong inflation figures to manipulate the population into submitting to its suffering. Although all central banks outline how they measure inflation, there is no full transparency regarding exactly how this mechanism is carried out. The actual method is often described by central banks, the issue is the way in which the survey is designed and how it is carried out. This also contributes to the reason why inflation figures sometimes sharply differ between countries, particularly the Consumer Price Index (CPI) (at least three different methods exist in the UK, and even the actual method used is not always transparent)[xxx]. The so-called ‘international standard’ used in the measure remains a mystery. The actual measurement tools and data are kept secret. Measuring tools are not the same in every country. As some central banks link it to the so-called ‘living condition’ index[xxxi], countries where wage increases took place, for example, will register a lower inflation rate despite the presence of high prices. It is often the case that core inflation is much higher than most of the central banks claim.

The profits of big corporations, supermarkets, and oil companies continue to increase despite the rise in prices. It is possible that profits, on paper, continue to rise for a time during inflation, but inflation means a fall in living standards that can, sooner or later, hit consumption and thereby also profits. US Federal Reserve Vice Chair Lael Brainard has also admitted that the price-price spiral is a real phenomenon[xxxii]. Some estimates suggest that over 50% of the increase may be due to this[xxxiii].

However, this can give the appearance that price can function on its own and be disconnected from the fundamental laws that emerge from capitalist production. This is what Marx refers to as the “ideal or mental form”[xxxiv] that can create an illusion that money can deviate from its function as an exchange value. This can lead to certain monetary policies being adopted by governments. Of course, most economic ideas linked to neo-liberalism are chaotic and ruthlessly aimed at focusing on maximising profit. Profit-mongering is presented as political economy. While capitalist ‘greed’ is a factor, simply associating it as the main reason for inflation would be incorrect. Such an assessment can lead to letting capitalists off the hook, attributing the issue solely to greed rather than the system itself.

Another common-sense mistaken argument that sometimes emerges is that inflation is seen as ‘good’ for the capitalists. While certain sections of the capitalist class (mainly those with physical assets and little debt) may benefit from every crisis, inflation poses significant problems for them as well. They worry about its impact on reducing demand and subsequently bringing down the rate of profit. Inflation also exposes the polarised nature of society and can intensify class tensions.

Workers, youth, and others are faced with unaffordable prices, while the super-rich – who are the cause of all problems – continue to protect their wealth, bringing forth acceleration in class discontent. This can eventually lead to an increase in class action – strikes, protests, uprisings, and so on – that challenge the power of bourgeois rule itself. Dire situations resulting in increased discontent can also challenge the political representatives of capital. Different types of political formations can develop among both the ruling class and amongst the middle and working classes.

There are many extreme examples[2], which are not posed at this stage, at least in the advanced capitalist countries, which demonstrate the danger that the bourgeois themselves feel and fear when inflation is on the rise. It may seem contradictory as to why the capitalists go after workers’ wages despite fearing a class war that could dig their own graves. While bailing out big banks with huge amounts of public money, BoE economists asked the British working population to accept being poorer[xxxv]. However, sections of the capitalist class are fully aware of the dangers. The British super-rich, small in number but significant in terms of the percentage of the economy they control, were gathered together in the five-star Savoy hotel in June this year. A conscious section that wants to maintain control gave this small crowd a stark warning: there is a “real risk of insurrection.”[xxxvi] Unless some wealth is distributed to poorer sections, “pitchforks and torches”[xxxvii] will come for them – they have been told. The Guardian newspaper had previously reported that the slogan of some of them is “raise my taxes – now!”[xxxviii] In a similar vein, backed by scientific data, Martin Wolf exposed the policies of the UK government. He is a far-sighted representative of capitalists and dismissed the government’s pay policy as “foolish”,[xxxix] but has no fundamental alternative. Martin Wolf however zigzags often and ends up defending the very same “foolish” policies.

Despite all this, the attack on living conditions and wages is generally presented as the solution to solve all crises, including monetary crises. The US Federal Reserve, the IMF, and various well-known bourgeois economists have admitted that wage increases do not have a direct correlation to inflation. There is no available data to support the claim otherwise. Yet governments constantly argue for driving down living conditions as a remedy, they use fear of inflation as an argument for cutting living standards. For example, Jeremy Hunt, UK chancellor (finance minister), argued that a pay rise above inflation would be a terrible mistake[xl].

A potential increase in cost through wage rises will not automatically result in a loss of profit for capitalists, as they can make a profit through increased supply[3]. This does not alter the general capitalist drive to push down wages and making the working class pay for the crisis. This does not directly lead to rising price inflation either. Similarly, a loss in wages and increased unemployment will not automatically bring down prices. In fact, real wages in Britain, for example, have been falling year after year. Research from 2022 by the Trades Union Congress showed that it was the worst year for real wage growth in half a century[xli]. Even the pro-capitalist think tank the Resolution Foundation produced research showing how wages for low- and middle-income families have been falling since the beginning of the crisis in 2008. This research estimates that, compared to a continuation of the pre-2008 trend, each worker lost at least £11,000 per year[xlii].

Marx and Marxists have repeatedly explained how wages are not linked to prices. The price of labour, i.e. the wage, is essentially determined by the antagonistic struggle between capitalists and workers. One key aspect where Marx departed from his predecessors was his unique explanation of the labour theory of value. Among various fundamental understandings, Marx showed that labour power is not like any other commodity. Labour power can be bought and sold like any other commodity. The competition between capitalists and labourers themselves can result in an increase or decrease in the price of labour power[xliii]. This gives the impression that labour power can be treated as any other commodity in the market. However, it is a special commodity that has no value of its own but is key to creating value for all commodities, solely responsible for creating surplus value and becoming a measure of value in the market. The price of labour power is not determined by the direct exchange of labour power for money. The labourer allows the capitalist to consume labour power before receiving payment. The price of labour power is therefore not determined by the ‘equivalent value’ of the labour power consumed in production. In fact, there is no way to determine the value of labour power. Instead, what is measured is the cost of the labourer. This is an important observation that Marx made, which is still out of reach for capitalist economists.

The very simple ‘logical’ argument that a reduction in demand through cutting employment and wages will adjust the market to the problem of supply and bring down inflation is wrong. Central banks continue to increase interest rates with this view. However, it widens the debt bubble and has devastating consequences for poor households, many middle-income families, and indebted companies. It also drives down consumption. Interest rates do not act like a ‘tax’ on big profit. Big monopolies and corporations, which constitute the majority of borrowers, today fundamentally borrow not to reinvest in production but also to speculate. Governments, such as the US, have already made substantial subsidies available for big corporations supposedly to bring production hubs back home. Although repayment increases during high interest-rate periods, their profit is not substantially reduced. Interest is generally part of the average profit[xliv]. No such option exists for workers and the middle class. High-interest rates shift money from the pockets of workers and the middle class into the hands of big banks. No government has a two-tier system with different interest rates for the poor and the rich. With stagnant income, high prices, and higher repayments (such as mortgage payments), the poor and the middle class are once again robbed to subsidise the rich. However, free-loading capitalists want to keep interest rates as low as possible, arguing that it helps with growth. It is possible to have low-interest rates and stagnation. There is no natural rate of interest[xlv] or a special/magical correlation that automatically controls market prices as per a central bank’s desires.

The bourgeois attempt to fully link the problem to the temporary post-Covid ‘increased’ demand, particularly due to increased savings and government handouts, far from correct. While relative demand may appear to be high as supply suffers, the cumulative impact is often caused by the downturn in the overall economy. It is not the additional money that workers have (either through handouts, savings, or wage rises) that creates all the inflationary pressure, as it is balanced by output expansion to some extent (the general functioning of the capitalist economy). The capitalist crisis in general, and the specific impact on production and supply, play a key role. For example, the rate of accumulation can be another indicator (and fictitious capital), as capitalists withholding reinvestment can have an impact on output. The shutdown of production, disruption of the supply mechanism, can also reduce output, as we have seen in the pandemic. This can also lead to the emergence of market competition, particularly in energy and key commodities, which can inflate prices. A combination of multiple factors determines prices rather than a single cause. Ignoring these aspects and linking inflation to wages and unemployment is necessary for capitalists to limit the damage they may incur on profit. This obviously has a counterproductive effect of further escalating the divergence between supply and demand. This is another reason why economies are pushed into recession or even depression as a result. It is through this that the capitalist crisis is eventually ‘solved’, or achieves a ‘new equilibrium,’ starting a new cycle.

Without addressing the real issue, arbitrarily trying to solve the problem by slowing down the economy will not solve the problem in the long run. Inflation can fluctuate and is not a one-directional phenomenon. Central banks adjusting their monetary policies again under the pressure of capitalism will bring back inflation, possibly even at a high rate like those seen in the 1970s. This is why ‘kicking the can down the road’ and prolonging the crisis, despite the prolonged suffering of a generation, has become ‘official policy’ in many countries. They have no alternative.

No capitalist measures, including Keynesian measures, have a proven history of solving anything permanently for capitalism. Remedies for the problems of capitalism do not reside within the framework of capitalism itself. In fact, every attempt to ‘cure’ the system has further contributed to the disease. The efforts in the 1970s to solve stagflation only compounded the problem. Neo-liberal economist Milton Friedman wrote a letter of advice to then-President Nixon, asking him to implement neo-liberal policies and shift the blame onto the previous Johnson government for the resulting negative conditions. This reveals the real motivations behind the so-called ‘cure’. Friedman was later awarded the Nobel Prize, partly for his work on ‘stabilisation policy’, but in practice, his ideas did not stabilise anything. Instead, they further destabilised the capitalist system as a whole. The crisis in the 1970s helped create an enormous financial bubble, which is now contributing to one of the significant existential crises for capitalism.

While the bourgeoisie pursues the destruction of value at the cost of enormous devastation to all life and nature on the planet, Marxists argue against the pursuit of private profit and question the very foundation of the system that perpetuates it.

Marxists reject the idea that the solution must be intertwined with mass suffering. Even a temporary solution can be found through class struggle forcing a reduction in profit and giving a greater share of the surplus value produced to workers. Capitalists giving up part of their profit would resolve a number of problems as a temporary measure but would not last long. The price of labour does not have a direct relation to prices but to profit, and this is the fundamental problem for capitalists. Their main motive is not just to protect profit but to ensure its rapid growth. Unite the Union in the UK published research early this year that investigated the profit of the top 350 companies. This research showed profit-margin increase for these companies was 5.7% in the first half of 2019 but doubled to 10.7% in the first half of 2022[xlvi].

Marxists argue for collective workers’ action against this. All solutions within the framework of capitalism are temporary and limited at best. Those who seek to end the crisis once and for all must work towards ending crisis-ridden capitalism. It is this class war that will determine the future of humanity and all life on the planet.

As an immediate measure, we must demand full transparency. This includes not only how inflation is measured, and data used, but also full disclosure of the books and financial details of the top corporations. The creation and circulation of money need to be fully transparent.

Workers-led committees should have control over how inflation is measured and monitor prices as a starting point. Popular committees that include trade unions and consumer groups can also implement methods to measure real living standards, not just in general terms but also in terms of how different classes are affected, in order to provide additional assistance to the deprived sections of society.

Implement a sliding scale of wages. Wages should be raised above the inflation rate, and an adequate minimum wage should be set accordingly (e.g., at least £15 per hour in the UK). Pensions should be increased, and further assistance should be provided to households.

All attacks on workers’ conditions should be stopped, and all austerity policies and anti-worker, anti-democratic legislation should be reversed.

Price controls should be implemented for all essential commodities enforced by workers’ committees. This should be accompanied by the nationalisation of key sectors such as energy, health, education, transport, and banks. Capital controls can be implemented to stop capital flight and increase investment. However, these are immediate measures and not a solution in themselves.

Capitalists may argue that these measures will have counterproductive effects and will bring down the economy. For example, if the price is fixed lower than the cost of production, it may be claimed that it will end production itself. It is also argued that price ceilings and price floors disrupt market equilibrium. For example, a ceiling creates excess demand and supply suffers as it is unable to meet all demands. This means a large number of consumers will not be able to benefit. Therefore, it is argued that a price ceiling is counterproductive and lifting it later will certainly result in inflation. It is also argued that price controls distort the function of price in representing value. The state’s attempt to correct equilibrium by providing subsidies is considered wasteful spending, as this money could be spent on other fiscal responsibilities and other state expenditures. This argument is not only extended to key issues such as rent control but also applies to the state’s setting of minimum wages. Most of these arguments (found in official textbooks in schools and universities worldwide) have more propaganda value than real scientific merit. Many factors are conveniently ignored. Equilibrium is not static, as treated in some arguments, but is also distorted during times of crisis. Additionally, prices are often intentionally set high (which could be argued is a form of price control) by capitalists, particularly by monopolies, during inflation and hyperinflation. Various other factors, such as increased investment in production and reduction of accumulation, are ignored.

Arbitrarily fixing prices by capitalist government will, of course, only exacerbate the crisis. It is often the case that when capitalist governments introduce these measures as temporary solutions to maintain their grip on power and to avoid further discontent resulting from a reduction in living standards, they fail. However, even under capitalism, these measures do not have a counterproductive impact if they are accompanied by large-scale investment. For example, if rent control is implemented along with significant investment in affordable housing construction, it can have a positive impact on society as a whole. The implementation of a minimum wage in several countries (though often not adequate) has improved productivity[xlvii].

Nevertheless, the question of who is in control of implementing such measures is crucial in determining the outcomes. Bureaucrats appointed by the state who arbitrarily set prices can lead to various fraudulent activities, especially when production remains in the hands of capitalists. Nationalising production and placing it under the control of a democratically elected committee of workers involved in production, as well as establishing distribution committees comprised of workers, in conjunction with increased investment in production, is also essential. With a democratically planned and organized economy, prices can be regulated, not based on profit, but on the basis of need.

This is why the demand for nationalisation is crucial. The price control we advocate is not a capitalist price fix, which often protects profit. Instead, it involves the implementation of a lower threshold with any necessary adjustments collectively controlled by workers in the nationalised industries. These measures will not bring down the economy or even wipe out the mass of profit. However, they could reduce the profits made by sections of the capitalist class.

Taking away even a small part of their profit will not happen voluntarily. Decisive class action will be necessary for that. The class struggle and the strength of each class will determine the extent of wage increases, for example. Workers’ organisations, such as unions, must intensify their combative actions. However, as long as the capitalist class remains in power, any gains made by the working class will be under threat. The powerful strength of the working class should be consciously mobilised against capitalism for a socialist planned economy. Unless such strength is decisively asserted, workers cannot improve their conditions. We must refuse to suffer for the profit of capitalism and begin the task of rebuilding the world on a new foundation.




[1] Marx explains that the simple value of a commodity at exchange combines two expressions. A commodity (say linen) does not express its value directly in the market, rather a value only emerges in the process relating to other commodities. In this process, a commodity (linen) expresses its value in another commodity (say a coat) indirectly – ie the relative value form emerges in the market through its relations to other commodities. However, the exchange cannot take place without equality. When another commodity (the coat) becomes equivalent (to linen), it serves as an expression of value – ie the equivalent form of value. Then this commodity (the coat) becomes a material and independent expression of value (of linen). Money, a universal equivalent, develops in this way and represents the value of all commodities at the exchange. Price is simply the expression of this monetary form of value.

[2] Two examples often cited to demonstrate the extent of suffering caused by inflation are the hyperinflation period during the Weimar Republic 1923 and present-day Zimbabwe. During the period of hyperinflation in Germany, the prices of essentials skyrocketed. For example, the cost of bread went from 250 marks in January 1923 to 200,000 million marks in November 1923. Workers demanded to be paid twice a day as the wages paid in the morning became utterly useless by the evening. Such conditions produced political turmoil. Not only was the productive mechanism of capital disrupted, but its dominance and rule came into question as a pre-revolutionary situation developed. Some claim that in 2008, inflation in Zimbabwe reached up to 100,000%. Unemployment simultaneously rose to 80%. Under the brutal dictatorial control of Robert Mugabe, a two-tier economy emerged, one governed by the US dollar. The Zimbabwean dollar could not keep up, reaching a point where it became too expensive for the government to even print money as the cost of printing exceeded its exchange value. Maintaining political authority under such circumstances for the capitalists is not easy.

[3] Karl Marx, in his speech to the (First) International Working Men’s Association in June 1865, dismissed the popular views and explained that wage rises do not automatically have to result in rise in prices, and pointed out the complexity of demand and supply, and how they adjust.  This speech is now available under the title ‘Value, Price and Profit’, and is a worthwhile read. Below are some extracts from it.

“A general rise in the rate of wages would produce a rise in the demand for, and consequently in the market prices of necessaries…” However “aggregate demand for commodities would, therefore, not increase, but the constituent parts of that demand would change. The increasing demand on the one side would be counterbalanced by the decreasing demand on the other side. Thus the aggregate demand remaining stationary, no change whatever could take place in the market prices of commodities.” Hence the “general rise in the rate of wages will ultimately result in nothing else but a general fall in the rate of profit.”

“Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself.”

Karl Marx, Value Price and Profit, <https://www.marxists.org/archive/marx/works/1865/value-price-profit/ch01.htm#c4> [accessed 24/05/2023]




[i] John Cassidy, Jerome Powell and the Fed Are Still Struggling to Understand a Crazy Economy Hit by the Pandemic and War, The New Yorker <https://www.newyorker.com/news/our-columnists/jerome-powell-and-the-fed-are-still-struggling-to-understand-a-crazy-economy-hit-by-the-pandemic-and-war> [accessed 24/05/2023]

[ii] Chris Giles, Bank of England governor says he is unable to stop inflation hitting 10%, Financial Times UK, <https://www.ft.com/content/0a8f0465-12ed-412b-94cb-571f9fb6f0d4> [accessed 24/05/2023]

[iii] Macrotrends.net, World Inflation Rate 1981-2023 <https://www.macrotrends.net/countries/WLD/world/inflation-rate-cpi>[accessed 24/05/2023]

[iv] Office for National Statistics (online), Government of UK, Global inflation: 1970 to 2022, <https://www.ons.gov.uk/economy/inflationandpriceindices/articles/globalinflation/1970to2022#:~:text=Over%20two%2Dthirds%20(69%25),inflation%20has%20been%20since%202008.> [accessed 24/05/2023]

[v] Milton Friedman, Inflation: Causes and Consequences. First Lecture.* Bombay: Asia Publishing, House for the Council for Economic Education (Bombay), 1963.Reprinted in Dollars and Deficits: Inflation, Monetary Policy, and the Balance of Payments, by Milton Friedman, pp. 21-46. Englewood Cliffs, New Jersey: Prentice-Hall, 1968. One of two lectures on “Inflation—Causes and Consequences,” at the Council for Economic Education, February 1963. <https://miltonfriedman.hoover.org/internal/media/dispatcher/271018/full> [accessed 24/05/2023]

[vi] The University of Chicago, Milton Friedman in his own words, <https://mfidev.uchicago.edu/about/tribute/mfquotes.shtml> [accessed 24/05/2023]

[vii] Jorge A Alvarez; John C Bluedorn; Niels-Jakob H Hansen; Youyou Huang; Evgenia Pugacheva; Alexandre Sollaci, International Monetary Fund (online), Wage-Price Spirals: What is the Historical Evidence? Published November 11 2022, <https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wage-Price-Spirals-What-is-the-Historical-Evidence-525073> [accessed 24/05/2023]

[viii] Jennifer Sor, Top economist Paul Krugman says food inflation has mostly been caused by Russia, Yahoo.com, <https://uk.sports.yahoo.com/news/top-economist-paul-krugman-says-005528345.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAKovgFSioTRR7uuswLWlF3Cw_8HcYqCcK0qcWV69KyWhBP1QjCJc-Ps-d5clBlWTZAhH_J9sZxxFRhe1qv0VRHxuveU402JLaHKqMQjtxSwv2oORVjWtZC0g-oJAHFVEPdpFO8DEWP_2zpjGHEN1GAKWihIsWYyda7el1naN9HTC> [accessed 24/05/2023]

[ix] William Schomberg, Suban Abdulla and Andy Bruce, Reuters News, 23 May 2023, BoE’s Bailey says ‘big lessons’ to be learned from inflation surge <https://www.reuters.com/world/uk/boes-bailey-says-big-lessons-be-learned-inflation-surge-2023-05-23/> [accessed 24/05/2023]

[x] Andrew Rawnsley, The Guardian online, The weekend Gordon Brown saved the banks from the abyss, 21 February 2010, <The weekend Gordon Brown saved the banks from the abyss> [accessed 24/05/2023]

[xi] Atlantic Council’s Global QE Tracker, <https://www.atlanticcouncil.org/monetary-policy-hub/> [accessed 24/05/2023]

[xii] Francois de Soyres, Dylan Moore, and Julio Ortiz, Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective Federal Reserve 23 June 2023 <https://www.federalreserve.gov/econres/notes/feds-notes/accumulated-savings-during-the-pandemic-an-international-comparison-with-historical-perspective-20230623.html> [accessed 24/05/2023]

[xiii] Philip Brien, Matthew Keep 26 April 2023 , Public spending during the Covid-19 pandemic <https://researchbriefings.files.parliament.uk/documents/CBP-9309/CBP-9309.pdf> [accessed 24/05/2023]

[xiv] UK Government, Examining the end of the furlough scheme, published 15 November 2021 <https://commonslibrary.parliament.uk/examining-the-end-of-the-furlough-scheme/#:~:text=Initially%2C%20it%20was%20due%20to,%2C%20with%20employers%20covering%2020%25.> [accessed 24/05/2023]

[xv] PA Media, The Guardian, 7 Jan 2022, Ladbrokes claimed £101.5m furlough money despite online profits <https://www.theguardian.com/business/2022/jan/07/ladbrokes-claimed-1015m-furlough-money-despite-online-profits> [accessed 24/05/2023]

[xvi] U.S. Department of Justice, Fact Sheet: Combating COVID-19 Fraud, <https://www.justice.gov/opa/press-release/file/1481801/download> [accessed 24/05/2023]

[xvii]  The New York Times, Where $5 Trillion in Pandemic Stimulus Money Went, Alicia Parlapiano, Deborah B.Solomon, Madeleine Ngo, Stacy Cowley, 11 March 2022  <https://www.nytimes.com/interactive/2022/03/11/us/how-covid-stimulus-money-was-spent.html>[accessed 24/05/2023]

[xviii] Bank of England, 1 October 2019, How is money created <https://www.bankofengland.co.uk/explainers/how-is-money-created#:~:text=Banks%20create%20around%2080%25%20of,central%20bank%20money%2C%20or%20reserves.> [accessed 24/05/2023]

[xix] The Economist, America’s government is spending lavishly to revive manufacturing 2 February 2023 <https://www.economist.com/briefing/2023/02/02/americas-government-is-spending-lavishly-to-revive-manufacturing> [accessed 24/05/2023]

[xx] Karl Marx. Capital Volume One, Chapter One: Commodities

[xxi] Warren Mosler, A Framework for the Analysis of the Price Level and Inflation 23/10/21 <https://media.realvision.com/wp/20220309173133/A-Framework-for-the-Analysis-of-the-Price-Level-and-Inflation.pdf> [accessed 24/05/2023]

[xxii] Kelton, Stephanie. The Deficit Myth. John Murray, 2020.

[xxiii] Ibid.,

[xxiv] Ibid.,

[xxv] Ibid.,

[xxvi] Ibid.,

[xxvii] Ibid.,

[xxviii] Karl Marx. Capital Volume One, Chapter Three: Money, Or the Circulation of Commodities

[xxix] James Kirkup, Gordon Brown admits he was wrong to claim he had ended ‘boom and bust’ The Telegraph 21 November 2023 <https://www.telegraph.co.uk/finance/recession/3497533/Gordon-Brown-admits-he-was-wrong-to-claim-he-had-ended-boom-and-bust.html> [accessed 24/05/2023]

[xxx] Office for National Statistics, Consumer price inflation, UK: April 2023 <https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/april2023> [accessed 24/05/2023]

[xxxi] William Tarr, Is Belgium’s Policy of Wage Price Indexation Economically Damaging? Harvard Economics Review August 8, 2022, <https://www.economicsreview.org/post/is-belgium-s-policy-of-wage-price-indexation-economically-damaging> [accessed 24/05/2023]

[xxxii] Lael Brainard, Staying the Course to Bring Inflation Down, Federal Reserve speech 19 January 2023 <https://www.federalreserve.gov/newsevents/speech/brainard20230119a.htm> [accessed 24/05/2023]

[xxxiii] Alex Maitland, Welcome to the era of ‘Greedflation’, 19 January 2023 Oxfam <https://views-voices.oxfam.org.uk/2023/01/greedflation/> [accessed 24/05/2023]

[xxxiv] Karl Marx. Capital Volume One, Chapter three, section 1 <https://www.marxists.org/archive/marx/works/1867-c1/ch03.htm#S2b> [accessed 24/05/2023]

[xxxv] Michael Race, Vishala Sri-Pathma, Bank of England economist says people need to accept they are poorer, BBC 26 April 2023 <https://www.bbc.co.uk/news/business-65308769> [accessed 24/05/2023]

[xxxvi] Rupert Neate, Super-rich warned of ‘pitchforks and torches’ unless they tackle inequality, The Guardian 30 June 2023 <https://www.theguardian.com/news/2023/jun/30/uk-super-rich-beware-pitchforks-torches-unless-they-do-more> [accessed 24/05/2023]

[xxxvii] Ibid.

[xxxviii] Rupert Neate, ‘Raise my taxes – now!’: the millionaires who want to give it all away, The Guardian 03 April 2021 <https://www.theguardian.com/news/2021/apr/03/raise-my-taxes-now-the-millionaires-who-want-to-give-it-all-away> [accessed 24/05/2023]

[xxxix] Martin Wolf, The UK government’s policy on public sector pay is foolish Financial Times UK 11 December 2022 <https://www.ft.com/content/ca81509b-e929-487f-8975-49d75dc4f78d> [accessed 24/05/2023]

[xl] Faisal Islam, Pay rises above inflation would be a terrible mistake, says Hunt BBC 13 April 2023 <https://www.bbc.co.uk/news/business-65267370> [accessed 24/05/2023]

[xli] Trades Union Congress UK, 2022 is the worst year for real wage growth in nearly half a century 12 December 2022 <https://www.tuc.org.uk/news/2022-worst-year-real-wage-growth-nearly-half-century> [accessed 24/05/2023]

[xlii] Reported by BBC Panorama, Stalling wage growth since 2008 costs £11,000 a year, says think tank, BBC 20 March 2023 <https://www.bbc.co.uk/news/business-64970708> [accessed 24/05/2023]

[xliii] Karl Marx. Capital Volume One, Chapter six, The Buying and Selling of Labour-Power <https://www.marxists.org/archive/marx/works/1867-c1/ch06.htm> [accessed 24/05/2023]

[xliv] Karl Marx, Capital Vol. III Part V Chapter 22. Division of Profit. Rate of Interest. Natural Rate of Interest. <https://www.marxists.org/archive/marx/works/1894-c3/ch22.htm> [accessed 24/05/2023]

[xlv] ibid.

[xlvi] Unite the Union, Unite Investigates: Corporate profiteering and the cost-of-living crisis commissioned by Sharon Graham 17 June 2022 <https://www.unitetheunion.org/media/4757/unite-investigates-corporate-profiteering-and-the-col-crisis.pdf> [accessed 24/05/2023]

[xlvii] Eduin Latimer: Low Pay Commission March 2022 The impact of the National Living Wage on productivity <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1076518/Productivity_report.pdf> [accessed 24/05/2023]

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