Smart consumers can cut inflation

 

Perhaps he was misquoted or he needs better economic advisers to explain elasticity but essentially economy minister Rafizi Ramli is advising us to be smart consumers and not to be suckers when it comes to price rises. He is right.

Inflation in Malaysia has changed from specific price rises in fuel, utilities and food, which is not formally inflation, to general rises in prices across the Consumer Price Index (CPI) categories, which is formally inflation.

This embeds inflation expectations and consumers expect prices to rise even for products with cheap production costs. They shrug their shoulders and accept it.

Businesses leverage this to raise prices sneakily or to compensate for low prices on controlled products by quietly raising prices on uncontrolled products. This why we see the prices of food rising even when we have price controls.

Inflation for food at home has fallen from 6.4% in July to 5.8% in November but for food away from home, inflation rose from 7.8% to 9.6% in the same period.

When faced with this, consumers have power and must play their role to switch their spending to lower-price options. You can still eat chicken but it is cheaper at home.

Smart consumers do this all the time when searching for the best price. Rafizi referred to price elasticity or ‘own-price’ elasticity, the sensitivity of demand to changes in the price of a specific product. As the price rises, we normally buy less.

We also have ‘cross-price’ elasticity where a rise in the price of one product causes a rise in the demand of a cheaper alternative. This could be the same product from another supplier or a substitute product we buy instead.

There are costs to this which we called ‘shoe-leather costs,’ in the time when we wore shoes but now lower-cost online shopping only wears out our thumbs.

Low incomes play a role too and we cannot view the cost of living just in terms of prices. When prices of essential goods rise people on low incomes have to stop buying non-essential items in order to afford the essential items.

This income effect makes inflation bite and is one of the main social reasons for keeping inflation low.

When this happens many people call for more price controls but these cause market distortions and supply shortages which raise the prices of essential items even further and harm the poor even more in the long-run.

According to deputy domestic trade and cost of living minister Fuziah Salleh, 1,220 out of 4,732 premises checked during Op Terjah nationwide had shortages of price-controlled essential items such as eggs, sugar, packet cooking oil and wheat flour.

This is partly because producers will not or cannot supply at low prices and although removing price controls will raise prices it is an important step in encouraging them to supply more.

Along with supply-side reforms to remove cartels and promote competition, including imports, this will help the market to find the right price.

So, as we move to a long-term solution to the cost-of-living crisis we must consider the collective role of consumers, suppliers and the government in creating an efficient market.

The government’s role is to free up prices and create competition, suppliers will respond to the price signals and supply more and consumers will moderate price rises by switching their spending to best-price suppliers. This is how the market works.

Those still struggling on low-incomes must be helped directly but we cannot continue with price controls and subsidies, and we certainly must not see a socialist-style, government price list. That is the road to serfdom. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.