SYDNEY, Jan 17 2023 (IPS) – Inflation worries topped Ipsos’s in 2022 overtaking COVID concerns. The return of inflation caught major central banks, e.g., the US Federal Reserve (Fed), Bank of England, European Central Bank “”. The persistence of inflation also the International Monetary Fund (IMF). The return of inflation and its persistence exposed the poverty of the economics profession, unable to agree on its causes and required policy responses. It also exposed the profession’s anti-working class biases.
Anis Chowdhury
Inflation goof
Almost all major central banks as well as the IMF dismally failed to see the coming of inflation. In December 2020, the that prices would rise by less than 2% in 2021 and 2022. It failed spectacularly when in December 2021, it estimated that even though prices were already rising by more than 5% a year.
The US Fed was not alone in failing to see inflation coming. The Governor of Australia’s central bank – the Reserve Bank of Australia (RBA) – was so confident of low inflation that he declared in March 2021 that the . Inflation in advanced economies during 2021 exceeded the average of forecasters’ expectations by around 5–8 percentage points. The IMF’s forecasts have badly and repeatedly undershot inflation.
There was a among most central bankers and leading economists that the price increases (or inflation) that began in mid-2021 , and price increases would slow or inflation would drift downwards in 2022. , of course, insisted otherwise, and wanted immediate anti-inflationary measures. Thus, policy confusion ruled.
Inflation phobia and dogma
Soon inflation phobia overtook and central banks were advised to act decisively with interest rate hikes even if it meant slowing the economy or a rise in unemployment. Exaggerated claims were made without evidence that not acting now would be more costly later.
References to were made to justify tough policy stances.
The dogmatic inflation hawks ignored the fact that, in most cases, inflation does not accelerate to become harmful hyperinflation, but remains moderate. They also ignored their own neo-classical macroeconomic model, which from moderate inflation.
Notwithstanding the which provides that economic policies should aim to foster “orderly economic growth with reasonable price stability, with due regard to [country specific] circumstances”, a one-size-fits-all policy of steep interest rate hikes became the only medicine to be applied to achieve a universal inflation target of 2%, . Yet, central bankers and mainstream economists boast their credibility!
Inflation excuse for class war
Inflation is primarily an expression and outcome of conflicting claims over the distribution of national output and income, e.g., firms’ profit mark-ups vis-à-vis workers’ wages. Thus, no sooner inflation spiked early in the year due to slow adjustment of COVID-induced supply shortages to pent-up demand, exacerbated by war and sanctions, leading central bankers and mainstream economists found an excuse to weaponise economic policies against the working class.
Stoking the fear of wage-price spirals, they advocate the use of an interest rate sledgehammer to create unemployment and, in turn, discipline labour. This is despite research within the and the which found no evidence of wage-price spirals since the 1980s due to declines in labour’s bargaining power. Thus, , “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”.
Research conducted by the IMF also found increases in firms’ or corporations’ market power, resulting in higher prices and profit margins. Yet, the IMF does not think such factors “”. Instead, it justifies such fattening of profits on the ground that “they provide flexible buffers between general wage and general price increases” and that it is only a catching-up “after taking a hit in 2020”!
But no such compassion is extended to the working people who have lost their lives and livelihoods. The calls for “front-loaded interest rate hikes simply got louder. The Bank for International Settlements (BIS) warned, “”.
Labour a clear loser
Labour is a clear loser. Labour’s income share in the GDP has been in s. Casualisation, off-shoring, anti-union legislation and technological progress have greatly reduced labour’s bargaining power, while privatisation and dilution of anti-monopoly legislation hugely strengthened corporate power and their collusive anti-competitive behaviour. Meanwhile, CEO compensation packages swelled to obnoxious levels, in the US as opposed to a 12% rise for workers during that period. Profiting from the pandemic, CEO pay increased by when workers suffered, and to .
Leading central bankers and mainstream economists conveniently created a dogma around a 2% inflation target to justify their anti-labour stance. The 2% inflation target has become a global norm akin to the law of gravity, even though it has no theoretical or empirical basis. The law of gravity differs depending on altitude, but the 2% target is said to be universal regardless of circumstances!
Collateral damage
Meanwhile, the advanced countries’ inflation fight is causing adverse spillover into developing countries. Higher interest rates have slowed the world economy, and triggered capital outflows from developing countries, thereby depreciating their currencies and lowering their export earnings.
Together, these are causing devastating debt crises in many developing countries, similar to what happened in the 1980s. The rating agency S P estimates that central bank rate rises could land global borrowers with in the coming years.
Instead of providing genuine debt-relief, the G20 . As during the pandemic, the IMF is moving to debt-distressed countries with conditionality-laden one-size-fits-all austerity packages. Thus, a Foreign Policy op-ed asked, “?”
Meanwhile, the chiefs of the and the urged “supply-side” policies professed to increase labour force participation and investment. These are code words for further labour market deregulation, privatisation and liberalisation.
IPS UN Bureau
