Inflation & (Un)employment

Fiscal policy

government use of public spending (G) and taxation (T) to influence aggregate demand.

Expansionary = deficit spending G>T, Restrictive T>G

Monetary policy

Central banks use of interest rates and money supply to influence aggregate demand

Expansionary = lower rates, buy bonds, supply liquidity. Contractionary = raise rates. Controlled by the central bank.

Expansionary Policy

policy that stimulates aggregate demand. Also called loose or accommodating. For fiscal policy: deficit spending. For monetary policy: lower interest rates.

Contractionary Policy

policy that reduces aggregate demand. Also called tight, restrictive, or non-accommodating. For fiscal policy: spending cuts or tax rises. For monetary policy: higher interest rates.

Labour force

Everyone who has a job or is actively looking for

Activity rate

Labour force divided by the working-age population

Unemployment rate

Number of unemployed divided by labour force

Consumer Price Index

eighted average of a typical household's spending basket used to measure inflation. Does not capture shrinkflation or skimpflation — understates real inflation.

Shrinkflation

When the price of a product is the same but the quanitity decrease

Skimpflation

Price of a product is the same but the quality decrease

Deflation

falling prices. Sounds good but is dangerous: consumers postpone purchases anticipating further falls → demand collapses → recession deepens. To be avoided.

Price stability

conventionally defined as CPI rising at approximately 2% per year. A neoliberal convention, not a law of nature. The choice of 2% rather than 4% has distributional consequences.

Demand-pull inflation

inflation caused by total spending (aggregate demand) exceeding the productive capacity of the econom

Cost-push inflation

inflation caused by rising production costs (oil, wages, supply chain disruptions). AS curve shifts left → prices rise AND output falls. This combination is stagflation. Pandemic inflation was primarily cost-push.

Wage-price spiral

a self-reinforcing inflation loop: tight labour market → workers demand higher wages → firms raise prices → workers demand even higher wages → spiral continues. Associated with full employment and strong unions.

Profit-price spiral

(Price Gouging) — when firms with market power exploit supply shortages to widen their mark-ups beyond what costs justify. Not driven by wages or demand — driven by opportunistic profit-seeking.

Stagflation

High inflation and rising unemployment

Phillips curve

Inverse relationship between unemployment and inflation - trade off

NAIRU (Non-Accelerating Inflation Rate of Unemployment)

neoliberal concept of a "natural" rate of unemployment below which any attempt to reduce unemployment further only generates more inflation without any permanent reduction in unemployment. The long-run Phillips Curve is vertical at NAIRU.

Real return

Actual return on a financial asset after adjusting for inflation. Formula: real return = nominal return − inflation rate. High inflation erodes the real return on savings and bonds.

Wage indexation/ real wages

automatic adjustment of wages to keep pace with inflation. Belgium has automatic wage indexation — prevents inflation from reducing real wages. Means inflation is not necessarily a cost-of-living crisis if indexation applies.

Kaleckis warning

Full employment would destroy itself

When workers cannot be fired easily, they become more assertive, demand higher wages than productivity growth justifies, and squeeze corporate profits. Capital will eventually engineer a recession to restore discipline. Proven correct by the 1970s stagflation and the Volcker Shock.

Reserve Army of Labour

Marxist concept (Marx) describing how capitalism maintains a pool of unemployed workers to discipline those in employment. When unemployment is high, workers accept lower wages and worse conditions. The Volcker Shock deliberately recreated this — as Alan Budd explicitly admitted