Inflation
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Central bankers have been caught unawares by rising prices that have exposed their “King Canute” theory of inflation, the former governor of the Bank of England Mervyn King has said. In a strong attack on how policymakers around the world have reacted to the Covid-19 crisis, Lord King accused them of relying too heavily on models that showed inflation always coming back to its target whatever the level of interest rates.
“This is the King Canute theory of inflation. A thousand years ago, King Canute of England set his throne by the seashore and commanded the incoming tide to halt. The tide continued to rise and dashed over his feet and legs, driven by the laws of nature,” the former governor said in a lecture to the Institute of International Monetary Research.“A satisfactory theory of inflation cannot take the form ‘inflation will remain low because we say it will’; it has to explain how changes in money – whether directly via quantitative easing or indirectly via changes in interest rates – affect the economy.”
“When King Canute sat in front of the incoming tide, his purpose was to show his courtiers that he was not omnipotent and could not by words alone undo the forces of nature. Central banks would do well to show the same humility.”
It’s interesting to see what is considered to be high inflation at different times. In the 1970s it was never below 7% and in 1975 it was over 24%. In the last few decades or so it’s been much lower.
Interest rates were also higher in the 70s and 80s. But I’m not clear whether consumer price inflation, as listed in the link above, would take interest rates into account.
Interest rates are not included in the consumer price index. They tend to be higher when there is high inflation (depreciation of the currency), otherwise those lending money would not be getting back the same purchasing power as they lent. They go up with currency inflation.
There is an article on rising prices in the December Socialist Standard, being sent out today.
The House of Lords (critical) report on Quantitative Easing mentioned by Mervyn King was discussed in the September issue here.
King is right. While central banks can control rising prices due to depreciation of the currency (as they control that and in fact cause it), they cannot control rising prices due to other factors such as prices rising through shortages of materials. Which seems to be the main cause of rising prices at the moment (also misleadingly called “inflation” when it’s caused by demand exceeding supply without affecting the purchasing power of the currency).
I recall talking with a younger co-worker about that period of time, He had been fed the myth of the Winter of Discontent and Union Wreckers of the Economy. Kept bringing up the rates of inflation. He was silenced when another older colleague told him how inflation didn’t really harm us back then because it was compensated by high and frequent pay rises. And a good reason why a strong union is always needed.
“I recall talking with a younger co-worker about that period of time, He had been fed the myth of the Winter of Discontent and Union Wreckers of the Economy. Kept bringing up the rates of inflation. He was silenced when another older colleague told him how inflation didn’t really harm us back then because it was compensated by high and frequent pay rises. And a good reason why a strong union is always needed.”
I had a similar conversation in my pre SPGB days when a fellow worker explained to me in words to the effect that “if rises in prices occur, that isn’t a problem for workers, wages are a price, we will just need to put the price of labour up like very other seller of a commodity”.
I also agree with ALB, the current crop of “economics” reporters struggle to distinguish between inflation (a fall in the value of money) and the action of the market to put up prices due to commodity shortages. If strawberries become expensive because of a bad harvest or lack of labour to harvest the fruit that is not inflation, the higher prices will balance the number of strawberries bought with the number of strawberries available, this is not a general fall in the value of money.
Keynes, writing in the 1930s (when the general price level went down as well as up) noted an advantage for employers of a slow depreciation of the currency. As a textbook puts it:
“Keynes expressed, in numerous passages in The General Theory, the view that wages were “sticky” in terms of money. He noted, for example, that workers and unions tended to fight tooth-and-nail against any attempts by employers to reduce money wages (the actual sum of money workers receive, as opposed to the real purchasing power of these wages, taking account of changes in the cost of living), even by a little bit, in a way they did not fight for increases in wages every time there was a small rise in the cost of living eroding their “real wages”.
A slow depreciation of the currency (of around 2% a year) is in fact now the coordinated policy of the G7 countries. So the so-called “wages-prices spiral” is started by governments depreciating their currency; and of course it’s not a “spiral” as it’s all prices including wages (the price of labour power) going up more or less together.
Whether this trick still works is a moot point as workers, like Alan and BD’s one-time work mates, learn what is happening and act accordingly through their trade unions.
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