Economic Policy Review ISSN 1313 - 0544

Prices Have Been “Wrong” Again

Author: Veliko Dimitrov / 29.08.2007
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Obviously ruling coalition politicians’ lack of other original pre-election ideas (local elections take place this autumn) just after they proposed 10% flat income tax. What they are now employing in their campaign is nothing but pure populism – promises for lower consumer prices through price control measures could not be anything different. There is however a second suggestion – more votes are not leading for the prime-minister and the other initiators of this idea and they really believe that are able first to determine and then to force “fair” price relations on the free market. If they really do believe this, all we could do is to offer them a three-day course on price formation and economic policy basics.

 

Are there any serious reasons for price hysteria? – No. Official data provide us with the following information:

 

 Consumer price indices by month

 

Accumulated inflation in 2006 – base – December 2005

Accumulated inflation in 2007 – base – December 2006

January

100.8

101.4

February

103.8

101.9

March

104.1

101.8

April

104.6

102.3

May

104.6

102.4

June

102.9

102.0

July

102.4

104.3

Source: National Statistical Institute

 

Even if we assume that the poor crop this year created tensions on the market and pushed prices higher, that is still no reason for serious concern and furthermore for any price control measures. The new relative price relations merely reflect the change in everyone’s supply expectations.

What the government should do – nothing (however, it can close down the State reserve, which sole function is as it is already clear the drain of taxpayer’s money through buying and selling reserve stock).

And what the government is up to? – deploy a swarm of state officials to inspect and take record of prices, comparing and analyzing them – the so called Commission for price observations. What this effort will produce is nothing but senseless reports and probably a couple of even more senseless fines. Moreover, this will plant in the feeling that producers and retailers are the bad and consumers are the good (such a demarcation does not really exist because all producers and retailers are consumers as well).