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Our View: There is no quick fix for inflation

inflation cyprus mail

Prices have been rising for several months now, sparking indignant comments in the media and calls by opposition parties for government intervention. Preventing these rises has become the latest populist cause of the politicians, whose main target is the electricity rate, which rose by close 40 per cent in August.

Faced with the political outcry, the government announced a 10 per cent, across-the-board cut in electricity rates for four months, with the Electricity Authority using its reserves to cover the loss. Subsequently the government announced it would reduce the VAT rate on bills for ‘vulnerable groups’ to five per cent. Now Akel has prepared a draft bill for reducing the VAT rate on all bills to 9 per cent, which reportedly has the support of other parties.

The government set a precedent with its price subsidy interventions and the parties now believed they are legitimised to do the same in order to safeguard people’s disposable income. It has also been said that the opposition parties wanted to show the government that if it does not take measures to control prices, the parties would do so.

But it is not just the government and the parties that have taken the populist role of price-controllers. This week consumers groups and supermarkets warned a dairy producer against going through with its plan to increase the price of milk by three per cent. The consumers’ association called on people to boycott the dairy company, while some supermarkets said they would not stock the company’s milk if the price was raised.

In the end, under pressure from the price-controllers, the dairy company decided not to increase the price. The news was welcomed by everyone, seen as a victory for people-power, yet there is something fundamentally wrong in having prices set by public sentiment rather than supply and demand. It is also grossly hypocritical for supermarkets, which charge whatever they like for most products they sell and could increase them by 10 or 20 per cent whenever they choose, to take the moral high ground.

Nobody enjoys prices going up, but inflation cannot be banished from an open economy, especially when it is caused by rising costs of imported good. Price fixing or state subsidies, however, create distortions in the market that will need to be dealt with at some point. There is no quick fix for inflation, especially when it is caused by external factors. Neither consumer groups nor political parties can stop prices rising.

People simply have to adapt to the new economic conditions by changing their spending habits, as they have always done to cope with inflation.

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