Inflation

Workers unite!... No, not like that

The Volkswagen Rabbit gained popularity in the 1970s in part due to its fuel efficiency – an instance of inflation interacting with design. (Image: Volkswagen)

In the summer of 2020, as everyone took stock after their first frantic brush with Covid, I became fascinated with the idea that the Western world was about to experience a major bout of inflation. A handful of forecasters had been making these speculations in the financial press, and I was hooked. What would happen if everything suddenly started getting more expensive? This hadn’t happened in a really significant way for fifty years. I pitched the story to a few magazines, but alas, I’m not much of a salesman, and no one wanted a boring economics piece. Prices started their upwards trajectory the following spring, at which point no-one needed me to tell them it was a big deal.

Almost four years later, inflation has reshaped the political landscape around the world. Anger at rising prices is the most obvious explanation for voters everywhere punishing incumbent parties at elections, a trend captured in the widely shared FT graphic below. Trump’s recent victory in the U.S. was the most seismic in its implications, at least according to conventional wisdom, so there are plenty of theories about what caused it. But most of them reserve a major role for inflation.

Source: https://www.ft.com/content/e8ac09ea-c300-4249-af7d-109003afb893

Luckily my brief excursion into inflation forecasting wasn’t a total failure. It convinced me that, while my interests still tended towards the cultural and anthropological, I had to find a framework that could accommodate the brutal facts of economic life. This was one of the reasons for my increasing focus on design. Yes, the artefacts that furnish our daily lives speak to questions of identity, emotion and belief, but they also say a lot about the contents of our wallets.

When prices go up or down, the consequences ripple out across the material world. In the 1970s, rising energy costs saw the spread of double-glazed windows in British houses, while car design moved towards lighter bodies, streamlined shapes and more fuel-efficient engines. Perhaps it’s no coincidence that carpets became a sign of affluence at this time too. In the last few years, inflation has paradoxically resulted in people buying more stuff, or at least certain kinds of it. As consumers gravitate towards super-cheap forms of retail, they encounter the temptations of affordable plenty. This, surely, is part of the reason that Chinese e-commerce platforms like Shein and Temu have taken-off so spectacularly. When prices trended upwards through 2021-22, I distinctly remember how the aisles of Lidl and Aldi began to bulge with well-heeled defectors from Waitrose. Now the Sunday Times, middle-class paper of choice, is celebrating Lidl as the place where you “come in for a pint of milk and leave with a lawnmower.”

What really interested me about inflation, though, was the insight it provided into the history of class relations. The absence of serious inflation in advanced economies, or “price stability,” was a central feature of the neoliberal era, starting in the 1980s. This was when, in an effort to overcome the inflationary chaos of the previous decade, governments in North America, Europe and Japan empowered central banks to regulate prices through strict control of interest rates and money supply.

The interest rate hikes of the early 1980s did defeat inflation, but they also caused a wrenching recession, surging unemployment and industrial conflict. This sounds bad, but for the neoliberals, it was an opportunity. Another major driver of inflation had been the power of organised labour to negotiate wage rises and employment security; higher wage bills mean higher prices. And so keeping prices down meant smashing that power – as exemplified by Ronald Reagan’s and Magaret Thatcher’s confrontations with the unions, and by the implosion of the Mitterand government in France.

With organised labour defeated in the West, the path was clear for the globalisation boom of the 1990s. This cemented the low-inflation formula by allowing businesses to seek the cheapest labour and production costs the world could offer, boosting profits while keeping prices low. In other words, low rates of inflation were the result of a particular balance of power in advanced economies. The workers lost, shareholders and consumers won.

This picture led some commentators on the left to theorise that the return of inflation could actually be a progressive development. When the cost of living is manageable, there is less incentive for atomised workers to combine as a political force. But if prices start rising faster than wages, the need to organise becomes urgent. The economic historian Adam Tooze was making this argument for some time. As he wrote in mid-2022:

The profit surge in the first phase of the COVID recovery only confirms the stark imbalance of our social conditions. The current debate about inflation and wage-price spirals is - more or less openly - a debate about whether that class balance might be about to shift. And if so, will that shift be merely temporary… or will the energy of a new generation of union organizers, impelled in part by rising prices, produce a more lasting rebalancing?

Which brings us to the sublime irony of this month’s big election. One of the major shifts that got Trump elected was the movement of working class voters to the Republicans. Trump won a majority of voters earning less than $50,000 per year, whereas the Democrats scored 57% in this category in 2020. The Republican advantage among the non-college-educated also grew. This is not the same as organised labour, of course, but unions are not the only way that workers can express themselves politically, especially when they remain historically weak. So perhaps inflation really has prompted a realignment – just a very different realignment to the one progressives were hoping for.

Source: https://x.com/patrickjfl/status/1854645395856482568

The relative importance of factors behind the recent inflation – energy shocks, supply-chain problems, profiteering, government spending – remains a matter of debate. But there are reasons to think that prices will remain high in the longer term. In their book The Great Demographic Reversal, economists Charles Goodhart and Manoj Pradhan argue that the coming era will be defined by the end of cheap labour and imports. Wages in poorer parts of the world cannot be kept down forever, while the tenor of international politics looks unpromising for free trade. In Western countries, meanwhile, the baby-boomer generation is retiring, further shifting the demographic balance away from productive workers and towards older consumers.

Assuming that key jobs in this geriatric society cannot be automated, particularly in the care industry, then the remaining workers will in theory have greater bargaining power – especially if indebted governments are relying more on their taxes. For Goodhart and Prajan, a smaller number of workers being paid more to produce fewer goods and services can only mean a persistent inflationary pressure. So unless the tech people can pull a rabbit out of the hat, we are probably heading for poorer and less dynamic societies, though perhaps more equal ones.