Fake inflation solutions

The typical measure taken to alleviate inflation is to increase bank borrowing rates to curb the business activity that would tend to riskier investments, but is that really working?

Central banks do not have many means at their disposal to tackle inflation. They use their bank borrowing rate in an effort to push up all interest rates, hoping that will dampen those businesses that might otherwise tend to undertake risky projects or investments. It is a very crude instrument that is indirectly targeting one group but affects all of society, and those with the least financial resilience the most. This assumes that inflation can be controlled by reducing business investment. However, inflation can also be influenced by wage increases creating too much money in circulation.

Controlling inflation by capping wages has been the most popular measure taken to keep inflation low, but this has resulted in stagnant wages for decades while prices have continued to rise, putting more pressure on workers' families. The gig economy and reduced bargaining power of workers through decades of anti-union government policies has made it difficult for wages to rise. However, the post-Covid-lockdown employment boom has allowed workers to have more bargaining power and increased unionisation, leading to increases in wages.

While Putin had hoped that Europe's dependence upon Russia's oil and gas would prevent them interfering in their invasion of Ukraine, it has resulted in Europe moving faster towards renewables, but also significantly increasing fossil fuel imports from other countries. That has pushed up global fuel prices, and while that makes renewables more economically viable in the mid-term, it has hugely increased short-term demand for fuels, leading to windfall profits, in turn leading to wage pressure and increased government expenditure in most countries.

In efforts to curb the increases in inflation that increased wages is expected to produce, central banks are again using interest rates to try to bring down inflation. The sharply increased fuel prices have made wage increases even more imperative, but also significantly increasing CPIs with their flow on to increasing government payments that are indexed to them. This leads to more money in circulation that central banks see as stimulating inflation, leading to more rate rises.

What central banks cannot influence is companies jacking up prices to produce record profits. These syphon off more money from most people while increasing the wealth of the already very wealthy. These rises can only be handled by governments, which in countries thoroughly enmeshed in neoliberalism is almost political suicide given the significant party contributions by exactly the same companies making record profits. Fortunately, the record profits while most were suffering from wages losses from Covid restrictions has weakened arguments against governments controlling prices.

The current inflation is not a result of a post-pandemic wage-price-spiral, but a profit-price-spiral due to the major corporations taking advantage of increasing commodity price pressures resulting from the pandemic supply chain disruptions and fuel cost increases, to increase their profit margins at significantly higher rates than the commodity cost increases. The Australian government is pegging gas pricing to limit the effect on households, businesses, and electricity prices. Other governments need to do more price-capping while allowing wages to increase to long-overdue livable levels.

What this all shows is the basic fragility of an economic system that does not have adequate controls to actually deal with bad actors, be they psychopathic war-mongering dictators buried in dreams of renewing past national glories, or psychopathic corporate leaders bent upon record profits despite the damage they do to their societies, let alone their ongoing efforts to weaken and sabotage democracy. What this shows is that those who do not care about their societies, except for how much they can increase their wealth, must not be allowed to have such egregious political influence.