Bill Mitchell: It's not inflation, not yet ..... Not yet ...

I'm gonna quote Bill Mitchell on inflation here, from 2011, from his blog.

http://bilbo.economicoutlook.net/blog/?p=13035

Mitchell quotes from the UK Guardian article of 5 Jan 2011, Inflation threat divides economists:

Some economists argue we must forget about raising interest rates and live with higher inflation imported from China and the east. If UK inflation were the result of excess demand in the UK then higher base rates could usefully dampen consumption and moderate inflation. If inflationary prices are driven by excess demand in the east or shortages in Australian wheat – factors beyond the control of UK policymakers – then why choke off our nascent economic revival with higher rates, they say.

Mitchell found that interesting, and wrote:

So the tension in the policy debate is whether to deal with a supply-side price surge (if it turns out to be significant) via demand-side policies (tightening interest rates and fiscal austerity).

I agree with Mitchell: Using tight money to fight supply-side inflation is just wrong.

• Peter Cooper agrees:

  Money creation can enable cost-push inflation, but the real source of the problem will be the cost pressures themselves.

• Abba Lerner (quoted by James Forder) agrees:

  ... if restrictive monetary or fiscal policy is used against sellers' inflation, spending is reduced when it is not excessive, so that we get a deficiency of demand, depression and unemployment...

• Even Scott Sumner agrees:

  ... there's different kinds of inflation. There's supply side inflation, which is created by shocks like sudden increases in oil prices, and then demand side inflation caused by overspending in the economy. It's really demand side inflation that the Fed is concerned about. There's not much they can do about supply side inflation.

For starters, to fight supply-side ("cost-push") inflation you need to know the original source of the cost pressure.

//

Mitchell explains what happens with cost-push:

So we get a “battle of the mark-ups” operating – workers try to get more real output for themselves by pushing for higher money wages and firms then resist the squeeze on their profits by passing on the rising cost – that is, increasing prices with the mark-up constant.

At that point there is no inflation – just a once-off rise in prices and no change to the distribution of national income in real terms.

However, if the economy is working at high pressure, workers may resist the attempt by capital to keep their real wage constant (or falling) and hence they may respond to the increasing prices by making further nominal wage demands. If their bargaining power is strong (which from the firm’s perspective is usually in terms of how much damage the workers can inflict via industrial action on output and hence profits) then they are likely to be successful.

At that point there is still no inflation. But if firms are not willing to absorb the squeeze on their real output claims then they will raise prices again and the beginnings of a wage-price spiral begins. If this process continues then you have a cost-push inflation.

For me, here's what stands out:

1. workers get higher money wages
2. firms raise prices to maintain their profits
"At that point there is no inflation"

3. workers respond by making further wage demands
"At this point there is still no inflation. But if"

4. firms raise prices again, and
"If this process continues then you have a cost-push inflation."

I suppose he says it's not inflation yet because the price increase isn't sustained yet, and inflation is defined as a sustained increase. But that's just my guess. Dunno what he was thinking, and he doesn't say.

I'm not comfortable with the idea that the first two or three or four increases don't count for much. And I'm not comfortable with the implication that how the inflation gets started is not important. Mitchell doesn't say it's not important how inflation gets started, but to my mind he implies it -- because, to me, how cost-push inflation gets started is the most important part of the story. The most important part, because if you want to stop the inflation, you have to know what caused it, and you'll find the cause at the start, or even before the start of the inflation.