The two Bs on inflation

29 May by Michael Roberts

“Instability in the economy. Recession. World crisis. Banknotes dollars on a table. Economic crisis. The fall of the national currency” by is licensed under CC BY 2.0.

A recent paper by mainstream heavyweights, Ben Bernanke (former Federal Reserve chief) and Olivier Blanchard (former chief economist at the IMF) has raised some eyebrows. Bernanke and Blanchard seek to argue that the inflationary spike in the US since the end of Covid pandemic slump was down to a sharp rise in ‘aggregate demand’ and not due primarily to supply blockages and weak productivity recovery in key sectors that I and others have argued – and certainly not due to ‘greedflation’, ‘price gouging’ or corporate profit mark-ups.

This is what they argue: “Ultimately, as many have recognized, the inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. reflected strong aggregate demand, the product of easy fiscal and monetary policies, excess savings accumulated during the pandemic, and the reopening of locked-down economies.” So the inflation burst was due to too much fiscal spending during the pandemic; too easy monetary policies (low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
) and a build-up of savings which were then spent in the recovery period.

So nothing to do with supply-side issues, then. But yet B&B go on to say that “initially, the inflation reflected primarily developments in product markets. To the extent that excessive aggregate demand set off the inflation, it did so primarily by raising prices given wages, through its contribution to higher commodity prices (which reflected other forces as well, including the war in Ukraine) and by increasing the demand for goods for which supply was constrained.” So inflation was kicked off by rising commodity prices, supply constraints and then the war in Ukraine – so supply-side issues after all!

Was it caused by excessive wage increases feeding through to prices? No, say B&B. “Our decomposition shows that, as of early 2023, tight labor market conditions still accounted for a minority share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of excess inflation.”

In particular, their decomposition of prices “yields several conclusions. First, the contributions of food and (especially) energy price shocks to the pandemic-era inflation were large. Energy price shocks in particular account for much of the rise of overall inflation in late 2021 and the first half of 2022, and the for the decline in inflation in the second half of 2022.” So again, it was commodity prices, not ‘aggregate demand’.

Second, the combination of increased demand for durables and shortages associated with disrupted supply chains was the dominant source of inflation in 2021 Q2, and the effects of supply chain problems, both direct and indirect, remained significant through the end of our sample period.” So it was also supply chain blockages.

Third, and importantly, the contribution to inflation of tight labor-market conditions—the leading concern of many early critics of U.S. monetary and fiscal policies—was quite small early on, and indeed was negative in 2020 and early 2021 as labor markets suffered from the effects of the pandemic recession.” So ‘tight labor markets’ and excessive wage demands played no role in raising inflation – on the contrary.

But B&B are concerned to ensure that the conventional mainstream theory is retained, namely that it is wage rises that cause inflation rises. They go on “over time, as the labor market has remained tight, the traditional Phillips curve effect has begun to assert itself, with the high vacancy-to-unemployment ratio becoming an increasingly important, though by no means dominant, source of inflation.” Even here, they temper their claim (“by no means dominant”). They must do so, because the graph above shows how small wage pressure has been (red block) compared to energy (dark blue) and food prices (light blue) and supply shortages (yellow).

What B&B want to push though is that now in 2023, attempts by workers to compensate for huge price rises hitting their real incomes by using their bargaining power in ‘tight labor markets’ will cause inflation to stay high. “according to our analysis, that share (wage share – MR) is likely to grow and will not subside on its own. The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. .”

So the tortuous policy to hiking interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates by the Fed FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
to ‘control inflation’ must be supported and maintained. “labor-market balance should ultimately be the primary concern for central banks attempting to maintain price stability”. In other words, weaken workers’ bargaining power by increasing unemployment through higher costs of borrowing to spend or invest.

Ironically, having advocated monetary tightening as the answer to inflation, apparently caused by excessive ‘aggregate demand’, they finish by saying that “Policymakers must be alert to the possibility that inflationary pressures can come from product markets as well as labor markets, for example, through unexpected changes in input costs or shifts in demand that collide with inelastic sectoral supply curves.”

Indeed. But don’t let that ‘possibility’ stand in the way of mainstream Keynesian theory on the causes of inflation and on the supposed efficacy of central banks hiking interest rates to ‘control inflation’ caused by factors beyond their control.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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