When we hear the word ‘inflation’, it usually brings to mind the prospect of rising prices for basic necessities, things like food, fuel and transport. This kind of inflation comes in two types – cost-push and demand-pull.
Cost-push inflation refers to the ‘pushing’ effect of rising input prices somewhere in the supply chain. When oil prices rise substantially, for example, prices across the economy rise as oil is used to produce and transport almost everything. Effectively, rising costs equate to a contraction in the potential amount the economy can produce.
Demand-pull inflation, on the other hand, refers to the ‘pulling’ effect of rising demand on prices. Usually, there exists a gap between what could be produced if all the resources in an economy were being put to use as efficiently as possible, and the amount of output we’re currently producing: the output gap. If that gap is negative – say, there are workers underemployed or other resources underutilised – there isn’t much demand-pull inflation. If the gap is positive – say, workers are being forced to work overtime – then the economy starts to overheat and prices start to rise.
There’s not much that can be done about cost-push inflation. Over the long-run, price increases may induce suppliers to produce more of the good, causing prices to fall – but there’s no guarantee this will happen, particularly if the good exists in fixed supply or is controlled by a cartel like OPEC. The real question is which group will be forced to bear the impact of rising costs.
Demand-pull inflation, on the other hand, requires central bankers to increase interest rates to slow down economic activity. If, for example, the economy is at full employment and businesses are still trying to increase investment, an increase in interest rates will make it more costly for businesses to undertake this investment and reduce inflationary pressure.
In both cases, the question we should be asking ourselves is this: who is paying for the costs of higher inflation? In our low-wage, largely non-unionised economy, it’s usually workers who are forced to pay for higher costs in the form of lower wages. The idea that we’re going to see a 1970s-style ‘wage-price spiral’ – in which workers push for wage increases in line with inflation leading to a spiral of rising costs and rising prices – is absurd in such a context.
In our economy, most workers simply aren’t powerful enough to demand wage increases in line with inflation. In the sectors where wage pressures are most obvious, the problem is a shortage of skilled workers as a result of both the changing labour market we’ve seen during the pandemic and a sudden fall in migration resulting from both the pandemic and the Tories’ desperate attempts to prevent people from migrating to the UK.
As the economy returns to ‘normal’ and the labour market adjusts, we’ll realise that these wage increases in certain sectors were temporary. In the meantime, most workers in most sectors will see any wage increases eroded by rising prices – and this comes on the back of a decade of wage stagnation that has pushed many families further and further into debt. Many of these households will be pushed over the edge by debt servicing costs when interest rates start to rise.
Workers, in other words, are going to bear the brunt of all the temporary and permanent economic shifts that result from the pandemic – particularly those on low wages, in insecure employment and living in the private rented sector. Black workers, women and the disabled will face even greater struggles.
But there is one group in society that has already benefitted substantially from the pandemic economy: the wealthy. The kind of inflation we don’t talk about – asset price inflation – has made the wealthy wealthier, and it’s largely the product of policies pursued by central banks.
Consumer price inflation is calculated based on the price of a basket of representative goods; in other words, things most households are likely to purchase. Asset price inflation – the increasing value of financial securities like stocks and bonds, as well as other assets like housing and art – is generally missed out of the discussion.
This is no surprise. The reason those on the right don’t like consumer price inflation is that runaway inflation can erode the value of their assets – if prices are rising and the value of your home stays the same, you’ll be less wealthy in real terms. But in our economy, asset prices are rising many times faster than consumer prices – and for as long as central banks continue to pursue extraordinarily loose monetary policy, this is unlikely to change.
The ideal situation for the wealthy would be for consumer prices to remain flat while asset prices continue to rise, which has been the situation we’ve had ever since the financial crisis. It benefits the most powerful people in our country that the conversation about inflation to focus almost entirely on consumer prices, with zero discussion of asset prices.
If we buy the line that, even after a decade of wage stagnation, what we need is less bargaining power for workers, lower public sector wages, and a lower minimum wage – all while maintaining central bank policies that have led to an astonishing increase in asset prices for the wealthy – we’ll be maintaining an economy built in the interests of billionaires.