Price spirals and possible remedies

Price spiral can also be triggered by shortages of one essential consumer goods such as “rice” or even a single raw material or factor of production such as imported petroleum products. As the price of rice rises, sellers of other essential commodities will raise their prices to afford themselves the consumption of rice. Workers who sell their labour, in turn, demand higher wages thereby setting a perpetuating cycle.

There is another microeconomic channel of price spiral called wage-wage spiral (generating price spiral), which occurs when one group of workers receive or negotiate a wage increase which sparks off a series of wage demands from other workers to maintain their relative cost of living.

The factors highlighted above are the antecedents to cost-push inflation. Other factors which also contribute to cost-push price spirals are increased import prices of raw materials, a depreciation of currency (Taka) and increased indirect taxation.

The daily, “can't live without” consumer goods such as rice, edible oil, vegetables, sugar, salt, onion, and other related produces are domestically produced. Daily price swings in any of these are not symptomatic of “too much money is chasing too few goods”, or demand push inflation. People can consume only so much of these essentials on a given day. Hoarding large quantities of rice, sugar and salt seems extremely risky and unlikely unless the hoarders and traders are politicised and protected.

Price spiral also occurs through expected future price increases. Such expectation of price increases is self-fulfilling; in an effort to beat tomorrow's price hikes of daily essentials consumers buy up goods today to hoard them aggravating the already vicious price spiral. Unless these price expectations are curbed by increased supply of goods whose prices run away faster, price spiral would be a nightmare.

In a market economy, prices are always subject to change based upon market forces and the interaction between consumers and business. This change in prices and the degree of the consequent change in demand and supply is known as elasticity.

Factors which effect supply elasticity are: price, resource costs, technology, competitive products, profit expectations, number of sellers, natural events, taxes, subsidies and government regulations, overproduction, inability to produce an item, and scarcity of natural resources.

It is well know that inflation benefits some at the cost of others. During periods of inflation, tax revenue of the government increases because the government can collect more taxes from businesses and people when higher prices push both business profits and incomes. As a result, some governments are willing to tolerate and may even manipulate market to let prices rise moderately to increase tax revenues and collect political contributions, the so called “tolls” for cooperating with businesses. Fixed income consumers are the worst hit by price spirals. Industrial disputes may occur if workers are unable to secure wage increases to restore their standard of living. Garments workers' recent violent unrests and protests is a burning example in point.

Although, the microeconomic milieu of firms and businesses in Bangladesh may not conform wholly to many of the assumptions of western free market models, the prescriptions to cure some of the same economic ills are not poles apart. We know that prices are the precursors to everything that happens in a market economy. Today's shortages and price spirals of daily essentials may become the caveat for tomorrow's surplus productions and price deflations. Because, resources are attracted to the production process which promises the highest returns, the market process will attract resources and entrepreneurs to the production of the goods which experienced shortages and unusual price spirals. Depending on the diagnosis of the market's ills, the government should develop policies to complement that process by adopting the following measures:

• Introduce a price and income policy to free price and wage increases;
• Develop a policy for an appreciation of the domestic currency;
• Reduce indirect taxation which stands in the way of entrepreneurs who want to invest in the production of daily essentials;
• Encourage entrepreneurs to invest in substitute goods and thus promote competition;
• Import capital goods and technology which assures efficient production of goods chronically in shortages;
• No price control policy measures or even a false threat about it be made because that would only discourage potential investors from taking future investment ventures in the areas in which price control is being talked about.

The doctrine of laissez faire would ask the newly appointed Commerce Minister not play dice with “price control”, instead look for sources of market imperfections such as price colluders (price fixers), the Cartel (supply cutters) and ways to dismantle and castigate them. Price controls without the synchronised increases in supply will exacerbate the situation with black market trading. If supply is ready at hand, then there is no need for price control to start with except only to punish the hoarders.

Barring unanticipated adverse weather conditions, a government which fails to guarantee bare daily necessities to its citizens loses the legitimacy to rule. The hue and cry about price spiral has been raising alarms for over two years now. The alliance government has been ignoring it the same way it treated the terrorists' menace as the creation of the unfriendly media and opposition's figment to spawn anti-government frenzy. Yes, the media and politicians by public pronouncements can create a fleeting onrush in price swings only to be smoothed out almost immediately by free flow of information about prices and supplies.

In a market economy, the government has the obligation to see to it that markets function efficiently and that the playing field is level for all participants. This requires mobility of factors of production, free flow of information regarding prices and technology, and competition among buyers (for outputs) and sellers (for inputs). Market regulation by the government is not about price control, it is to ensure that the operating rules do not discriminate individual participants or interest groups based on political affiliations, ethnicities, and religious bias. Although, these prescriptions are in contrast to the ruling alliance's ideology of politicising anything and everything, there is no detour from the free market's law of operations.

Dr. Abdullah A. Dewan is professor of Economics at Eastern Michigan University.