Our View: We must all adapt and learn to cope with the higher prices

High prices of fuel, grain, meat and vegetables have become a popular subject for the media. Indignant stories about the the constantly rising price of fuel, the soaring cost of living or the extortionate price of cucumbers are everywhere, as if this is news for people, who have not noticed their disposable income steadily reduced every month.

One reason for this fascination with rising prices could be the extended period of price stability prices we have experienced. European economies have had very little inflation to deal with for the last 13 years, with rates staying below the 2 per cent, despite quantitative easing and interest rates below 1 per cent. After such an extended period of price stability the high inflation rates of the last few months have come as a big shock to government as well as individuals.

We are now faced with an average inflation rate of about 6 per cent which is likely to increase as Russia’s war in Ukraine puts more upward pressure on energy prices and creates world shortages in grain. The war has made a bad situation, caused by the post-pandemic supply chain problems, worse. There is now talk of the onset of stagflation in developed economies, a term coined in the seventies when the oil crisis caused prices to rise while economies stagnated and unemployment was high.

In the past, the only way of dealing with inflation was shock therapy treatment – high interest rates and tightening the money supply which usually caused high unemployment and recession – but the European Commission has not entertained any such ideas at present. On the contrary, there are reports that the ECB would maintain interest rates at the record low levels even though it will reportedly restrict quantitative easing. It could, however, resume buying government debt if unemployment starts rising again.

The situation in Cyprus is no different from the rest of the EU member-states as the rising prices are a global phenomenon affecting everyone. Akel has turned, what it calls ‘expensiveness’, into a political weapon with which to attack the government for its alleged failure to take measures to protect living standards, which are falling because of the rising prices. Every day the party issues an announcement about ‘expensiveness’, while its mouthpiece carries lead stories about households seeing their incomes vanishing at the start of each month.

So as not to be accused of sterile criticism, the party is preparing three bills that “could offer relief.” It wants the levy for renewable energy sources on electricity bills scrapped, no VAT to be charged on electricity bills for emissions and abolition of double taxation on fuel. It has not said what these measures would save a household, but it would not be very much. It should calculate what benefits a small house would have from the two measures for the electricity bills and the impact of its third measure on fuel price. Then, we should also be told how much the government would lose in tax revenue and from where it would cover this loss.

These measures would be a drop in the ocean for most households. In fact, all these measures are regressive as they would offer very little relief to low-income households while benefitting high-earners who have bigger houses that consume more electricity and cars with more powerful engines that use up more petrol. Blanket measures might be much easier to implement, but they are costly for the government in terms of lost tax revenue and unfair, as they offer little relief to those genuinely in need. Relief and support measures should be targeted as they cost less and benefit those who really need them. Surely, a party embracing communist ideals would have recognised this.

It is always low-income earners that suffer the most in inflationary conditions having to contend with the increased prices of basic necessities such as bread, meat, vegetables and electricity, but not even Akel is proposing state intervention to keep food prices at affordable levels. What the government should look at are targeted measures, aimed at supporting those on the lowest incomes. Admittedly, this is an administratively costly and complex undertaking, but it has to be done, because the inflation rate does not appear like it will decrease any time soon. If there was a state safety net preventing people falling through the poverty line there would have been no need for targeted measures but one does not exist.

As for the people that are relatively better off, they would have to change their consumption habits to get through this difficult period. They may have to go on fewer out of town car trips, eat out less, take fewer holiday, avoid waste when buying and making food and reduce their electricity consumption among other things. We must all adapt and learn to cope with the higher prices, despite many of us having had no experience of inflationary conditions, because this new economic reality might not be as transient as some had hoped.