by CEDRIC DURAND
Behind the headline inflation figures—above 8 per cent in the us for the third quarter of 2022 and over 11 per cent in the eu—there are unmistakable signs of a new macroeconomic regime taking form. The surge in prices marks a striking contrast with the deflationary tendencies that followed the 2008 financial crisis or the so-called great moderation of the long 1990s. As price rises gathered pace during 2022, the dovish ‘Team Transitory’ camp lost ground. In April, the Bank for International Settlements took stock, warning of price spillovers across sectors and between prices and wages, and that the structural factors that had kept inflation low might be waning with the retreat of globalization. The General Manager of the bis announced a policy turn:
The adjustment to higher interest rates will not be easy . . . Households, firms, financial markets and sovereigns have become too used to low interest rates and accommodative financial conditions, also reflected in historically high levels of private and public debt . . . Nor will the required shift in central bank behaviour be popular. But central banks have been here before. They are fully aware that the short-term costs in terms of activity and employment are the price to pay to avoid bigger costs down the road. And such costs represent an investment in central banks’ precious credibility, which yields even longer-term benefits.footnote1
Since then, his colleagues from the fed, the ecb and the boe have promised to continue with rate rises, while anticipating higher unemployment as a result of a worldwide shift towards this stricter monetary regime.footnote2
And here we are. In its ‘economic outlook’ for 2023, the imf offered a gloomy prognosis:
The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next. The three largest economies, the United States, China and the Euro Area will continue to stall. Overall, this year’s shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.footnote3
The financial sector has pushed back, increasingly nervous about its own stability in the face of this hawkish stance. In October 2022 Robin Brooks, chief economist at the Institute of International Finance—the global association of the financial industry—noted on his way back from an imf/World Bank meeting that there had been no consensus on monetary policy: most policymakers wanted to keep hiking aggressively; most market participants wanted central banks to slow. ‘When I drive into fog, I slow down’, Brooks tweeted. ‘There’s massive global uncertainty. Slow down!’ On the same day, Macron took up the call with an undisguised attack on the ecb, expressing his concern at the European monetary-policy actors’ ‘explaining that we should wreck European demand to better contain inflation.’footnote4
This is no time for Schadenfreude, given the scale of the hardship facing the popular classes and the low- and medium-income countries with alarming levels of distressed debt.footnote5 Nor will it be sufficient for socialists to take advantage of the divisions between fractions of capital, in this highly volatile conjuncture. In politics as in finance, instability is raising the stakes. We are entering a high-risk moment, where it is important to identify the logic of the tectonic movements taking place. Rampant financial, ecological and geopolitical crises, exacerbated by the turbulence of the pandemic and the war in Ukraine, are fuelling the present instability. While that is the backdrop to the return of inflation, the phenomenon has a logic of its own. It involves three distinct mechanisms, with combined political-economic dynamics:
- First, the exogenous shocks and imbalances caused by the pandemic’s disruption of global supply chains, just as demand was boosted by massive state support, and a composite energy shock turbocharged by the war in Ukraine.
- Second, distributive capital–labour struggles, engendered by the initial surge in prices and exacerbated by falling real wages and companies’ price gouging.
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