A political economy perspective for public debate
Introduction
Inflation has returned to the centre of public debate in the 2020s. In public discourse it is often described as a technical problem: excessive money creation, supply shocks, or temporary imbalances between demand and production. These explanations are not incorrect, but they are incomplete. They overlook a more fundamental question: why does inflation reappear recurrently in capitalist economies, and why are its effects so unevenly distributed across social groups and firms?
This article advances a simple but demanding proposition: inflation is not necessarily a malfunction of capitalism, but a phenomenon that can arise from its normal mode of operation. Inflation is neither inherently good nor inherently bad. It becomes socially and economically problematic because prices, wages and incomes do not adjust in the same way or at the same speed, and because price-setting occurs within asymmetric relations of economic power.
The aim of this text is educational and analytical. It seeks to contribute to informed public debate by framing inflation as a distributive and institutional process, not merely as a macroeconomic indicator to be managed by central banks.
Prices, market power and social relations
In standard economic models, prices are often treated as neutral signals. They transmit information about scarcity, guide production and consumption decisions, and coordinate markets. While useful, this representation abstracts from how prices are actually formed.
In capitalist economies, prices are also strategic decisions. Firms operate in markets with very different competitive structures. Some firms—typically large or dominant ones—possess significant market power, while smaller firms act largely as price takers. Under private ownership of production, firms seek to preserve profitability and margins, not simply to clear markets.
During inflationary episodes, this asymmetry becomes particularly visible. Leading firms often behave as price makers, adjusting prices pre-emptively, while smaller firms absorb cost increases or face shrinking margins. This distinction is crucial for understanding why inflation generates not only conflicts between labour and capital, but also conflicts within capital itself.
Prices thus reflect not only costs, but also bargaining power, strategic behaviour and relative economic position.
Inflation and capitalism: a structural relationship
Inflation is frequently portrayed as an abnormal outcome, caused by policy errors or exceptional shocks. Such factors matter, but they do not explain why inflation appears repeatedly across countries and historical periods.
From a political economy perspective, inflation can be understood as a recurrent systemic outcome of capitalism. In systems characterised by decentralised price-setting, profit-oriented behaviour, staggered contracts and imperfect coordination, inflation can function as a mechanism through which distributive tensions are temporarily resolved.
This does not imply that capitalism requires high inflation. It implies that inflationary pressures are likely to re-emerge whenever conflicts over income distribution, costs or competitive positions intensify.
Inflation is not neutral: institutions and unequal adjustment
In a hypothetical world where all prices, wages, pensions, rents, taxes and contracts adjusted simultaneously and proportionally, inflation would be largely neutral. Relative positions would remain unchanged.
In real economies, such neutrality does not hold because institutions matter. Wages are shaped by collective bargaining, labour law and union power. Public transfers depend on political decisions. Financial assets are often indexed ex ante, while wages are adjusted ex post, if at all.
Inflation is therefore structurally non-neutral. It becomes economically relevant precisely because adjustment is unequal, amplifying existing differences in protection and bargaining power.
The data: how distributive conflict appears in trends
The figures below illustrate typical distributive patterns observed during inflationary episodes. The data are illustrative trend models, designed to reflect stylised international evidence rather than a specific national case.
Source: Synthetic data inspired by OECD, ILO and IMF evidence
Charts: Author’s own elaboration
Labour share of income
The labour share measures the proportion of total income accruing to workers. The declining trend reflects the tendency of wages to lag behind prices during inflationary periods, even when employment remains relatively stable.
Mark-ups and intra-capitalist conflict
Mark-ups tend to rise during inflationary episodes. This should be interpreted as both a cause and a consequence of inflation. Cost shocks often trigger price increases, while firms with market power raise prices to protect margins and hedge against uncertainty. This mechanism aligns with the concept of sellers’ inflation (Isabella Weber).
Large firms and financial actors are typically better protected through pricing power or indexation than small and medium-sized productive firms, reinforcing intra-capitalist hierarchies.
Inflation and wage adjustment
The gap between inflation and wage growth illustrates the central distributive mechanism of inflation: prices adjust rapidly, wages adjust slowly. This wage lag explains why inflation produces persistent redistributive effects even after headline inflation declines.
Inflation, policy and economic stability
If inflation reflects institutional asymmetries and power relations, purely technical responses are insufficient. Monetary tightening may reduce inflation, but often at the cost of slower growth, higher unemployment or increased debt burdens.
Effective responses must therefore go beyond inflation targets. Competition policy, wage coordination, collective bargaining frameworks and income policies play a central role in shaping how inflationary pressures are distributed and how socially costly inflation becomes.
Conclusion
Inflation is not merely a technical malfunction, nor simply the result of policy error. It is a possible expression of capitalist economies where prices are privately set, coordination is imperfect and indexation mechanisms are unequal.
Because inflation operates through institutional structures and power relations, sustainable solutions cannot rely exclusively on monetary policy. They must also involve policies that address market power and strengthen wage-setting institutions—through competition policy, wage coordination, collective bargaining, and (where appropriate) price–income arrangements—so that adjustment is not systematically pushed onto those who move last.
Understanding inflation as a distributive conflict reframes the debate: the key question is not only how to lower inflation, but how to govern prices, wages and incomes in a way that limits unequal adjustment and social costs.
Further reading
- De Loecker, J. & Eeckhout, J. – Market power and mark-ups
- Eeckhout, J. – The Profit Paradox
- Philippon, T. – Competition and market structure
- Weber, I. – Sellers’ Inflation
- Blanchard, O. – Inflation, margins and distribution
- Stiglitz, J. – Market power and the cost of living
- IMF, ILO, UNCTAD – Inflation, wages and income distribution
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