After the prices pause

The components of the Retail Price Index for the April-June quarter will need to be read with the aid of a magnifying glass. They will reflect the situation on the prices' front after the price stability agreements following the introduction of the euro came to an end at the end of March. The agreements were reached with importers, distributors and companies who had impressed upon them by the highest political authorities the need to ensure price stability during the running-in of the euro.

In response, a substantial number of business people in those sectors pledged not to increase prices to ensure a smooth transition to the euro, which was adopted on January 1.

Over the weekend, this newspaper's Sunday sister reported that both the Finance Minister and employers had insisted that the expiry of the price stability agreement should not automatically lead to a hike in prices. Minister Tonio Fenech said that the authorities were "not expecting anything to happen." They anticipated that business would continue "as usual".

The minister said that, judging by the information received by the government from importers, there should not be a hike in prices. The signatories themselves, he observed, had always insisted that prices would not increase once the agreements came to an end. Yet everyone is conscious of the international price reality.

Mr Fenech recalled that both the price stability agreements and the FAIR pricing agreements in retailing were limited to six months and their intention had been to ensure a smooth changeover. This had been achieved, he told the Sunday Times, and no one in Malta wanted price freezes now that the voluntary period of the agreements was over.

That was all well and good. But there can be no denying that the price pause must have created considerable pent-up pressure on prices. In fact the minister said that the euro observatory and the price watch structure would remain in place.

"If we see price increases that are exorbitant and unjustified, we will continue to investigate as we have done in the past to ensure a fair deal to consumers," he concluded.

That is realistic but time will tell where the thin line between market conditions and effective price control will be drawn.

Pent-up pressure cannot remain without release for long. That release will depend on market conditions. Also contacted by The Sunday Times, the Malta Employers' Association director general Joe Farrugia took a practical view. He said prices were regulated by the market and it was not in the interests of employers for them to be increased. That is certainly the case. Price increases feed into the Retail Price Index and thereby into the annual statutory cost-of-living increase.

The increase is given irrespective of the state of health of an employer in the context of competitive market forces and without any relation to increases in productivity - or their absence. The fact is, however, that the term "employers" has a restricted definition in this context.

Importers and distributors are employers too. They feel the pinch as much as anyone else when wage costs go up.

But the term applies mainly to the sectors competing in exports, including those who have to compete against import substitutes. It is not as if prices and wages do not also rise in export sectors, a case in point being China, where inflation is well on the move. But Malta's manufacturing competitors tend to start from a considerably lower cost-base, as they also tend to do in tourism.

In contrast, when it comes to higher value, knowledge-based services, we have a lower cost-base but that too could suffer from erosion should inflation in Malta run at a faster rate than in competitor countries, such as Ireland and Luxembourg.

While also suffering from inflationary pressure to some degree or other, one is not aware that competitor countries face pent-up inflation. If it is there in Malta, the government's watch will prove to be of restricted value.

I find it hard to give a strong interpretation to the minister's suggestion that the price-stability pact signatories themselves had "always insisted" that prices would not increase once the agreement ended. Nobody can give an insistence which means that an importer or distributor would absorb in total any increases in supply prices which took place over the life of the stability agreement - and subsequently. Suppliers who understand the market properly and enjoy enlightened self-interest will do their best to contain price increase, not least by trying to be more efficient. But they will doubtlessly try to pass on increases which they cannot offset. Either that or, eventually, they will go out of business. The minister knows that well enough. Which is why he qualified his stance with the very careful statement included above, that is, "If we see price increases that are exorbitant and unjustified, we will continue to investigate as we have done in the past to ensure a fair deal to consumers".

The government will definitely have to continue to uncover why certain medicines are as much as a third higher in price than elsewhere when economies of scale of purchases cannot offer an acceptable explanation. The authorities will also have to ensure that hidden monopolistic or quasi-monopolistic practices do not pinch purchasing power out of the pockets of unwary consumers. A tougher policy of naming and shaming will be required.

The April-June quarter will give the early signs of what the aftermath of the price pause is going to be like.