Pricing truth

Why are prices rising, and can anything be done about it?

Rising prices are not a worry primarily because of the implications to the euro adoption objective. The immediate social impact and more gradual economic consequences constitute a bigger consideration. Movements in the Retail Price Index (RPI) yield the headline figures in Malta, but the EU uses the Harmonised Index of Consumer Prices (HICP) to assess whether prospective members of the European Monetary Union meet the inflation convergence criteria.

Somewhat broader than the RPI, the harmonised index sets Malta's 12-month moving average - the inflation rate - at 2.7 per cent up to April, just above the current indicated convergence criterion, against three per cent as measured by the RPI. The HICP confirms, though, the rising trend of consumer prices in Malta; that April was a bad month.

Prices rose over the level of April 2005 by 3.81 per cent according to the RPI, and by 3.49 per cent according to the HICB. The here-and-now is biting. Consumers feel the pinch. Production costs, like consumer costs already rising under the immediate impact of higher fuel and energy costs, will be going up again once the loading onto the statutory cost of living adjustment works through. Higher fuel and energy costs have been working through the various sectors.

The overall April increase, though, seems to have been driven much more by the higher cost of imports over a year ago. Even had that not been evident it would still not be possible to attribute inflationary pressures to excess demand - purchasing power is already squeezed. Monetary policy cannot be deployed in this scenario. To try to depress demand by raising interests, therefore, would be economically futile, and socially harmful.

Both the government and the opposition are suggesting that the government can influence the price trend, the former brandishing old price orders, the latter stressing the regulators must regulate and report to the politicians regularly. A considerable part of the upward shift in prices over the last two years does relate to government measures. The most obvious is the increase in the top VAT rate (to 18 per cent) and the extension of the reduced five per cent rate to a much broader base.

Belatedly, some are realising that the government should have negotiated better over how medicines could be regulated, and that compliant costs were unnecessarily high. But I do not believe that encouraging the importation of generics, as the Finance Parliamentary Secretary has urged, can work as much as he understandably wishes. Externalising gross margins along the supply chain and encouraging pharmacies to compete, rather than all of them applying the same margin on a medicinal product, would have a better chance of influencing these important prices.

There is some limited role for the government to fulfil. But it is the consumer who mostly can influence prices within the limit that can be done. The remarkable truth is that consumers do not exercise their strength nearly enough. The Opposition Leader was right to call for more encouragement and a wider role for consumer associations. But over the years there has not been much enthusiasm from among consumers to join or back such associations.

There should be a stronger call from right across the political spectrum to urge consumers to be discerning when they shop, to compare prices, to lend weight to bodies that act on their behalf.

Consumer education is not in much evidence. It should start with the basic truth that, outside the impact of taxation on domestic demand for goods and services, and of the impact of indirect taxes on end prices, governments can do little to influence market prices downwards. The price of such honesty may be loss of political opportunity to rubbish the other side.

It could be a gain to consumers to the extent that they get the grim but challenging message.