Flawed logic

Last Updated on Thursday, 18 January, 2024 at 9:38 pm by Andre Camilleri

Recent articles and editorials are unfortunately pushing a very flawed logic with regards to inflation. The reasoning is that since prices, especially food prices are increasing, then that means that market competition is failing. This is flawed logic. In essence, if market operators are being affected by the same source of cost increases, it is natural that all food prices are increasing. If prices of food products increase because of foreign food prices at source then it is likely that this will affect most market operators. The same goes for other cost sources, be it shipping costs, labour costs, insurance costs or any other type of cost.

The same logic seems to be applied with regards to food inflation. As we all know food inflation has also very serious social considerations as it affects everyone, most badly those in the lower income groups. However, as shown below, the food inflation rate experienced between June 2022 and July 2023 was below the euro area average. It is only in the last few months, from August 2023 onwards that the food inflation in Malta was above the euro area average, which is likely due to an element of delayed adjustment in our market as the small size of our market means that food importers would have to procure for a number of months at one go before being able to renegotiate prices.

However, I am personally very doubtful that what seems to be the chosen way forward to bring down food inflation, by having certain food items by certain importers and in certain supermarkets, covered by some sort of price fixing or price capping, will effectively manage to push down food inflation.

All economic research of this world, clearly indicates that even the most diluted versions of price fixing or price capping, end up distorting consumption towards price-controlled goods or can cause chronic shortages of these goods, while effecting other superior products by having their prices increased and thus having the formation of parallel markets. It does not take much to realise that importers and retailers will likely recoup any losses from products with price fixing or price caps, by increasing prices on other products, which ultimately has a negative impact on consumer purchasing power and runs contrary to the aim of reducing food inflation in the first place. Such mechanisms can also end up distorting the market by disadvantaging those market operators not included in such schemes, thus reducing long-term competition in the first place.

Research clearly indicates that improving the competitive environment, also through a sound regulatory framework that ensures the proper functioning of competitive markets is surely a more effective means of lowering costs to consumers than the use of price fixing or capping. We are running the risk of creating new problems, rather than providing effective solutions.

It is much wiser that we make sure that our price regulatory frameworks are working correctly and that competitive market forces are allowed to work across all market sectors, for more sustainable solutions. Ultimately, when this inflationary period is behind us, we need to make sure that we still have a functional competitive market which can continue to contribute efficiently and effectively towards economic growth.

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