WORLD WORLDWIDE GERMANY BERLIN News Journal Update - (en) Germany, Berlin, Die Platform: Inflation and the "Profit-Price Spiral" By Red-Burned-Boulet (ca, de, it, pt, tr)[machine translation]

 Wage demands are dismissed as too high, many people have to turn over

every euro twice because of the increased prices, while the profits are
bubbling up. What we know about inflation and what we should know for
future wage wars! ---- With reference to the book "Inflation" by Klaus
Müller, I would like to put forward the thesis that the term "wage-price
spiral" is wrong. For this purpose, inflation as such should first be
discussed in order to justify that the term "profit-price spiral" makes
more sense to classify the current inflationary situation.

Inflation:

Inflation is usually defined as an increase in the price level (on
average for all prices) and thus accompanied by the devaluation of the
money supply. The price level is an overall economic factor and does not
relate to individual areas or industries. This means that, for example,
not only the price of milk but all prices are rising at the same time.
Price increases as such occur regularly and are considered normal. The
European Central Bank (ECB), for example, only speaks of a problematic
inflation rate if the price level rises by more than 2%. The ECB writes:
"In the medium term we are aiming for an inflation rate of 2%."[1]And
further: "That means in our opinion, too low an inflation rate is just
as negative as too high an inflation rate."[ibid.]"Just as negative"
refers to deflation, ie a permanent fall in the price level while the
available money supply is appreciating at the same time. The Deutsche
Bundesbank explains why the ECB conflates deflation and inflation:
"[...]deflation also damages the economy: Although people can buy more
when prices are falling on average, a general price decline also has
negative effects. The companies make less profit, sometimes even
loss."[2]The Deutsche Bundesbank explains why the ECB conflates
deflation and inflation: "[...]deflation also damages the economy:
Although people can buy more when prices are falling on average, a
general price decline also has negative effects. The companies make less
profit, sometimes even loss."[2]The Deutsche Bundesbank explains why the
ECB conflates deflation and inflation: "[...]deflation also damages the
economy: Although people can buy more when prices are falling on
average, a general price decline also has negative effects. The
companies make less profit, sometimes even loss."[2]

Measurement of inflation:

To measure the inflation rate, the Federal Statistical Office compiles a
fictitious basket of goods[3]with around 700 "typical" and
"representative" goods and services. The current basis for measuring the
inflation rate is a basket of goods based on the year 2020[ibid.].
Accordingly, the basket of goods is compared monthly with the basket of
goods from 2020 and the inflation rate is thus determined.

"Perceived" inflation:

The fact that the inflation rate measured by the Federal Statistical
Office can deviate from one's own wallet is due to the fact that the
average shopping basket does not usually reflect one's own shopping
behavior. At the same time, the calculation using the fictitious
shopping basket also does not take into account the widely varying
incomes and other expenses such as rent, insurance, etc. among people.
It is difficult for the fictitious basket of goods to make a general
statement about the burden of inflation on households. In an Allianz
Trade study[4], Jasmin Gröschl, senior economist at Allianz Trade,
explains: "The perceived and actual inflation gape particularly in
Germany"[ibid.]and further "It was most recently at almost 17% and thus
a whopping 9 percentage points (pp) higher than the actual rate of
inflation in this quarter."[ibid.]The study goes on to say: "The
discrepancy has various reasons. For example, consumers pay more
attention to price changes for common purchases such as groceries and
beverages, fuel or other errands in the supermarket. If these prices
rise above average there, people tend to feel that inflation is
significantly higher." The study explains that the above-average price
increases that are actually experienced are euphemistically a "feeling".
The fact that this "sensation" has a real effect on the respective purse
disappears in the fictitious shopping cart and is finally dismissed as a
"distorted picture"[ibid.].]The study goes on to say: "The discrepancy
has various reasons. For example, consumers pay more attention to price
changes for common purchases such as groceries and beverages, fuel or
other errands in the supermarket. If these prices rise above average
there, people tend to feel that inflation is significantly higher." The
study explains that the above-average price increases that are actually
experienced are euphemistically a "feeling". The fact that this
"sensation" has a real effect on the respective purse disappears in the
fictitious shopping cart and is finally dismissed as a "distorted
picture"[ibid.].]The study goes on to say: "The discrepancy has various
reasons. For example, consumers pay more attention to price changes for
common purchases such as groceries and beverages, fuel or other errands
in the supermarket. If these prices rise above average there, people
tend to feel that inflation is significantly higher." The study explains
that the above-average price increases that are actually experienced are
euphemistically a "feeling". The fact that this "sensation" has a real
effect on the respective purse disappears in the fictitious shopping
cart and is finally dismissed as a "distorted picture"[ibid.]. fuel or
other errands in the supermarket. If these prices rise above average
there, people tend to feel that inflation is significantly higher." The
study explains that the above-average price increases that are actually
experienced are euphemistically a "feeling". The fact that this
"sensation" has a real effect on the respective purse disappears in the
fictitious shopping cart and is finally dismissed as a "distorted
picture"[ibid.]. fuel or other errands in the supermarket. If these
prices rise above average there, people tend to feel that inflation is
significantly higher." The study explains that the above-average price
increases that are actually experienced are euphemistically a "feeling".
The fact that this "sensation" has a real effect on the respective purse
disappears in the fictitious shopping cart and is finally dismissed as a
"distorted picture"[ibid.].

Inflation in relation to wages:

If, for example, the rent increases, but the nominal wage (gross wage or
net wage) of the workers remains the same, the real wage falls
(describes the goods and services that can actually be purchased with
one's own wages). If the nominal wage rises at the same time as the rent
increases, the real wage remains the same. If the rent does not increase
but the nominal wage increases, then the real wage increases. In 2022,
real wages fell by around 4% on average[5], and by 2.3% in the first
quarter of this year[ibid.]. An average shows a mean value, in which,
however, important analytical differentiations that need to be made,
such as income differences due to the gender pay gap, for example,
inevitably disappear.

Minimum Wage/Citizen Income Inflation:

"The minimum wage is to rise to 12.41 euros in 2024"[6], although this
increase, to quote SPD leader Saskia Esken: "does not necessarily take
inflation into account"[ibid.]. For the first time, there was no
consensus in the minimum wage commission regarding the increase[ibid.].
The Food-Genuss-Restaurants Union (NGG) said: "This fatal decision
completely ignores the reality of life of millions of people and does
not fit in with the times"[ibid.].

In order to "do justice" to the inflationary increase, "according to the
assessment of the chairwoman of the Social Association Germany, Michaela
Engelmeier,[..]the minimum wage would even have to be increased to at
least 14.13 euros"[7].

In contrast to unemployment benefit II (Hartz 4), the rate of inflation
is included in the increase that takes place every two years in the case
of citizen income[8], but the increase in 2024 requires an amount that
does not meet basic security requirements. The chairwoman of the board
Michaela Engelmeier from the social association (SoVD) comments: "That
is simply not enough. We stand by our demand of 650 euros and 100 euros
immediately for the transition. Because those affected in basic security
are already suffering from skyrocketing prices and ever-increasing
inflation. We cannot leave them alone now."[ibid.]

Due to the lack of realistic adjustments of the minimum wage and basic
income to the current inflation rates, the people who are dependent on
the minimum wage and/or basic income are among those most affected by
inflation.

"Wage-Price-Spiral" or "Profit-Price-Spiral"?

The inflation rate, which is determined using the basket of goods
described, is usually the basis for trade union demands. The inflation
rate is shown depending on the calculation or the content of the
shopping cart. This means that the trade union demands can already be
influenced in this process by keeping the inflation rate artificially
low through the basket of goods. For the current inflation rate, "the
year 2020[is now used]. Previously, all calculations related to the base
year 2015."[3], as a result, inflation fell from 7.9% to 6.9%[ibid.].
The "perceived inflation" described is completely left out here.

Let us now take the current inflation rate[9]as an example: Some unions
made demands that went beyond what was supposed to be needed at the
current inflation rate. At the same time, it was echoed through all
media houses that the unions should not use their demands to turn the
so-called "wage-price spiral", according to which prices would also rise
due to higher wages, which I believe to be a mistake.

For a better understanding, we must first look at how prices are
created: The prices are always determined by the respective company
(capital). The constraint here is profit maximization. A company that
does not maximize its own profit in the face of competition will
inevitably disappear from the market. The value of a commodity precedes
the price. This value consists of constant capital (buildings, machines,
materials, etc.) and variable capital (wages). Let us take, for example,
a carpenter's workshop in which constant capital is expressed. The
variable capital, ergo the wage labour, ergo the wage worker(s): he now
produces a chair, he: It has therefore added "added value" to the
material (constant capital) wood by "adding" its own labor power and the
invested working time. The company receives its profit from this added
value or from a wage payment that does not correspond to the "increase
in value" resulting from labor and, above all, working time, i.e. by
retaining part of the generated added value. The wage is therefore only
one, albeit an important factor[10], of the value preceding the price.
However, how the company gets from the value to the actual price is
determined by the company with regard to speculative profit in the
context of competition. The price is thus ultimately determined by the
company (capital). which does not correspond to the "increase in value"
resulting from labor and, above all, working time, i.e. by retaining
part of the added value created, the company receives its profit. The
wage is therefore only one, albeit an important factor[10], of the value
preceding the price. However, how the company gets from the value to the
actual price is determined by the company with regard to speculative
profit in the context of competition. The price is thus ultimately
determined by the company (capital). which does not correspond to the
"increase in value" resulting from labor and, above all, working time,
i.e. by retaining part of the added value created, the company receives
its profit. The wage is therefore only one, albeit an important
factor[10], of the value preceding the price. However, how the company
gets from the value to the actual price is determined by the company
with regard to speculative profit in the context of competition. The
price is thus ultimately determined by the company (capital). However,
how the company gets from the value to the actual price is determined by
the company with regard to speculative profit in the context of
competition. The price is thus ultimately determined by the company
(capital). However, how the company gets from the value to the actual
price is determined by the company with regard to speculative profit in
the context of competition. The price is thus ultimately determined by
the company (capital).

Economics typically explains inflation using one of three theories.

The theory of "demand inflation"[11]explains that an increased demand
for goods that cannot be serviced leads to a price increase.
The theory of " supply inflation"[ibid.]assumes cost pressure with
regard to constant and/or variable capital. Aside from the "bad" wages
(variable capital) and the alleged "wage-price spiral", this applies in
particular to materials and resources (constant capital) such as natural
gas.
The " quantity theory " assumes that "under certain conditions there is
a causal dependence of the price level on the money supply"[12].
However, even "today's economic theories[...]emphasize the weak
connection between the money supply and inflation"[ibid.]. "The
Bundesbank economists[come]to the conclusion: The money supply is only
partly to blame for inflation."[13]
Apart from the "partial blame" mentioned, today's inflation is also not
explained with the theory of "demand inflation", but with the theory of
"supply inflation". Increased production costs are explained with
"supply bottlenecks and delivery difficulties"[14]and, based on this,
warnings are given of a "wage-price spiral". Jurik Caspar Iser writes in
April in Die Zeit: "ECB President Christine Lagarde also warned of wage
increases in March when the trade unions in Germany called for
large-scale strikes." Mainly as a result of the pandemic, there were
supply bottlenecks and delivery difficulties worldwide. The consequences
of the war in Ukraine have aggravated the situation. In some areas,
according to ECB data, profits have risen faster than wage costs since
2019."[ibid.]

An evaluation by the industrialized countries organization OECD paints a
similar picture: "In Germany, unit profits have risen by 24% since the
last quarter before the pandemic, while unit labor costs have only
increased by 13%."[15]And further: "[that]profits have risen faster than
labor costs in most countries".[ibid.]

The "IFO recognizes high price increases"[16]and declares "companies
increase profits despite inflation".[ibid.]The Institute for Economic
Research goes on to say: "These companies have used the situation to
increase their profits significantly"[ibid.]and "according to the IFO,
the gross operating surpluses, i.e. corporate profits, have risen
sharply in almost all major sectors of the economy".[ibid.]

The economist Isabella M. Weber comes to the conclusion: "There were
price increases that exceeded the cost increases.[...]Some companies
would not have lowered their prices even if demand had fallen, but would
have increased them further"[ibid.]

None of the economic theories described includes the profits (profit
maximization) of the companies (capital) in their analysis. "In the
opinion of experts, further research is required to assess the exact
extent of the importance of corporate profits for general price
developments." the prevailing inflation is due to the price increases of
companies (capital) in terms of their profits (profit maximization).

Companies (capitals) have no interest in price reductions if these are
contrary to their profits. On the contrary, it must be assumed that at
the latest since the beginning of inflation (May 2021 2.2%[17]) the
price screws have been turned, since the compulsion to make a profit
(profit) is an indispensable constant in the capitalist economy.

The price determinations preceding the profits/profits include all the
conditions mentioned and are speculative calculations, because no price
development, for example for resources, can be conclusively foreseen. No
price results from a linearly calculable automatism, but remains
speculative. This speculation must always have profit/profit in mind,
since this is the essence of your own company. This means that
entrepreneurial speculation in terms of profit maximization always
determines the price. From this it can be concluded, as before, that
price does not follow inflation, but that inflation follows price.

The term "profit-price spiral" sensibly classifies the current
inflationary situation. He shows that the price increase is due to
profit. The term "wage-price spiral", on the other hand, suggests the
cause in "wage". As shown, this must be contradicted loud and clear.

Future wage wars:

So if, in addition to an artificially low calculated shopping basket,
ergo the inflation rate, there is a false awareness of the effects of
wages on price increases and trade unions demand inflation compensation
based on this, then this can never do justice to the real situation.
Wage demands would always have to be a few percentage points above
inflation in order to do justice to the actual "perceived" inflation, or
many percentage points if it is to be an actual increase in real wages.
Let's also not forget the hidden price increases that always exist, for
example by reducing the contents of the packaging while the price
remains the same.

In future wage struggles, the "profit-price spiral" must be placed at
the center of the political debate. Let's work our way into our trade
unions, sharpen their anti-capitalist awareness and let's not let
ourselves be sold "below value" for as long as we have to.

Sources:

[1]"European Central Bank"

https://www.ecb.europa.eu/ecb/tasks/monpol/html/index.de .html

[2]"Price Stability"

https://www.bundesbank.de/de/service/schule-und-bildung/erklaerfilme/preisstabilitaet-61
3648

[3]"Statisticians recalculate inflation - annual inflation corrected
downwards"

https://www.tagesschau.de/wirtschaft/ Verbraucher/
Verbraucherpreise-deutschland-101.html

[4]"Allianz Trade Study: Perceived and actual inflation diverge - in
Germany the discrepancy is particularly strong"

https://www.allianz-trade.de/presse/pressemitteilungen/allianz-trade-studie-geuehlte-und-tatsaechliche-inflation.html

[5]"Development of real wages, nominal wages and consumer prices"

https://www.destatis.de/DE/Themen/Arbeit/Verdienste/Realloehne-Nettoverdienste/Tablen/reallohnentwicklung-quartal.html

[6]"What you need to know about the minimum wage"

https://www.tagesschau.de/wirtschaft/minimum-wage-faq-100.html

[7]"Minimum wage of 14 euros required"

https://www.mdr.de/messengers/germany/politics/minimum-wage-germany-two-thousand-three-undzwanzig-increase-100.html

[8]"Increase in Citizens' Income: There should be so much more money
from next year"

https://www.fr.de/wirtschaft/buergergeld-regelsatz-erhoeht-mehr-geld-hartz-4-erhoehung-92027098.html

[9]"Inflation rate in Germany from June 2021 to June 2023"

https://de.statista.com/statistics/data/studie/1045/umfrage/inflationrate-in-deutschland-veraenderung-des-
Verbraucherpreisindexes-zum-previous-year-month/

[10]"Total sales and selected costs (share of total sales) 2020 by
employee size classes" - as of July 11, 2022

https://www.destatis.de/DE/Themen/Branchen-Enterprise/Bauen/Tables/total
sales-costs.html

[11]"Questions and Answers on Inflation"

https://www.bundesregierung.de/breg-de/suche/faq-inflation-2062284

[12]"Money Supply"

https://de.wikipedia.org/wiki/Monetary

[13]"Higher money supply, higher inflation? Bundesbank judges with a
clear yes"

https://www.capital.de/geld-versicherungen/hoehere-geldmenge-hoehere-inflation-bundesbank-
judges-mit-klarem-jein-33139608.html

[14]"Caught in the Profit-Price Spiral"

https://www.zeit.de/wirtschaft/2023-04/inflation-
Verbraucherpreise-profitstreben-unternehmen-gewinne

[15]"OECD logoOECD Employment Outlook 2023: Artificial Intelligence and
the Labor Market"

https://www.oecd-ilibrary.org/sites/079c6ebb-en/index.html?itemId=/content/component/079c6ebb-en#section-d1e1182-6efdca2aa9

[16]"IFO recognizes high price increases - companies increase profits
despite inflation"

https://www.n-tv.de/wirtschaft/Unternahmen-steigern-Gewinne-trotz-Inflation-article23966162.html

https://www.ifo.de/pressemitteilung/2023-03-07/unternehmen-handel-bau-und-landwirtschaft-nutzten-inflation-um-gewinne

[17]"Inflation Monitor - How much are prices rising right now?"

https://interaktiv.tagesspiegel.de/lab/inflation-monitor-how-strongly-rise-the-prices/

Reading recommendation:

Inflation - Klaus Mueller

https://shop.papyrossa.de/Mueller-Klaus-Inflation

https://berlin.dieplattform.org/2023/08/17/inflation-und-die-profit-preis-spirale/
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