What Inflation in 2022 Will Teach Us About Capitalism

In 2021, inflation returned. After a year-long debate, nobody can any longer deny this. Next year, we will discover whether it’s here to stay and how much bitter economic medicine will be required to quell it.

On this vital issue, opinion is as divided as ever. Optimists still maintain that even if inflation has turned out to be more than a transitory blip, it will soon die down. Whether they’re right depends on the outcome of some of capitalism’s most profound conflicts.

A number of factors will indeed combine to push downwards on inflation next year. Used-car prices doubled and gasoline prices rose by 50% last year. That’s not going to happen again. Bottlenecks in global trade have already begun to loosen up a little. And there is ample room for central banks to tighten monetary policy; so far, there has been no attempt to reduce demand by raising the price of money or cutting back on its supply.

It’s encouraging that the bond market expects inflation to barely exceed 2% five years from now and the Fed’s interest rates not to rise even that high. Consumer expectations aren’t much different. If they were to change and become entrenched, then inflation would be hard to dislodge. But for now, investors believe that price rises can and will be brought under control relatively painlessly.

Still, permanently higher inflation remains a possibility. Whether it comes to pass will depend on two core questions that have long plagued capitalism: Will labor gain a greater share at the expense of capital? And, if so, will companies absorb higher wage costs or pass them on to customers?