Ordinary people have been watching their grocery bills climb to new heights as prices rise on processed food, cereals, meat, dairy, fruits and vegetables – virtually everything we eat. Inflation in the last two years outpaced the rise in wages in most industries. For the most vulnerable families, the squeeze at the grocery store has become much more dire.
As revealed by Times of Malta a few days ago, the government has negotiated a scheme with leading supermarkets, importers and major food retailers to reduce the prices of up to 400 basic food items by 15 per cent as of February.
Prime Minister Robert Abela acknowledged the problems that food importers were facing, such as more expensive logistics. However, he recalled his government’s assistance as a consequence of the Ukraine war and said that he now expects businesses to help reduce prices.
The Chamber of Commerce disagrees with the scheme, arguing that the government’s actions amounted to price control that limited consumers’ choices. So, who has the right strategy to fix inflation?
The eyebrow-raising spikes at the grocery store can only partly be blamed on the manufacturers’ higher costs, like supply chain bottlenecks, logistic challenges and supply shortages. This narrative offers the perfect jumping-off point for companies to raise prices and major food importers to take advantage of the moment to boost their profits.
Determining how much retailers make on each unit they sell and how their margins compare to the pre-COVID and Ukraine war periods is difficult. In a sense, economy-wide cost increases act as a coordinating mechanism that allows firms competing for market share to raise prices together safely. Undoubtedly, market dominance makes the supply chain more brittle.
This is especially relevant to small economies like Malta. Deregulation has indeed given consumers better choices as companies become more efficient. This has often meant lower prices for consumers and higher profits for companies – until a crisis hits and, suddenly, there are shortages and supply bottlenecks.
During a crisis, there is an implicit understanding that every company is going to raise prices. It is a tacit agreement, a subtle wink and a nod of understanding. This leads to price-gouging and is not fair to consumers.
Of course, supermarkets and importers want to pass on their costs and consumers would prefer prices not to rise. The problem is that there is a yawning gap in power between these two opposed interests.
The government did well to intervene to protect consumers, even if the method used is far from being perfect. The current price reduction scheme affects essential food items but the costs of other crucial services must be addressed. For instance, recently, some private clinics have raised the administration fee they charge patients visiting a consultant by 40 per cent. This is not acceptable.
Malta is not the only country dealing with the impact of high inflation. US states are enacting stronger antitrust laws – statutes prohibiting unlawful business practices that harm competition and consumers. Anti-price gouging laws are another tool in the arsenal of the government.
The government must strengthen the consumer protection agency. It must be able to carry out an analysis of business margins on essential products and services to determine whether their margins are reasonable when compared to what they were in pre-crisis times. Some fiscal authorities are even considering taxing those companies that are raising prices substantially in excess of costs.
There is no silver bullet to curb high inflation. Ultimately, the best weapon will be the one that causes the least collateral damage.