Two government measures for helping people cope with inflation are in the pipeline – reduction of VAT on basic consumer goods and the creation of a shopping basket app that will list prices for a range of products at different supermarkets. There has been significant pressure, for the last four or five months, mainly from Akel, although other parties have jumped on the bandwagon, for government measures aimed at dealing with what has come to be known as ‘expensiveness.’.
It is perverse that the most effective tool for fighting inflation is the raising of interest rates which everyone, including Finance Minister Makis Keravnos, appears opposed to. Keravnos has been urging the banks to absorb a part of the interest rate rise rather than pass it all on to loanees, which in a way would undermine the ECB’s monetary policy. Then again, higher interest rates take many months to have an impact on prices while governments are under public pressure to provide instant solutions, even if they are not effective.
For example, cutting VAT on basic consumer goods such as bread, milk and baby foods might not be passed on to the consumer as shops might keep prices constant and benefit from the reduction. Would the tax department recruit a team of inspectors to ensure the VAT cuts are passed on to the consumer? And could shops be stopped from increasing prices by the same amount as the VAT cut, so as to reap the benefits? It is a difficult path the government has chosen. VAT cuts on electricity bills work because there is one supplier, which is under government control but how would milk prices be controlled given the long supply chain?
Apart from being an administrative nightmare, it will have little effect on prices other than creating the impression that government was doing something to tackle ‘expensiveness.’ The shopping basket app would be more helpful, assuming that prices are updated daily, and the supermarkets cooperate. The supermarkets’ association has already expressed reservations about the measure, claiming the state would be intervening in a sector in which competition worked very well. Distortions would be created in the market, argued the association’s head, although he did not explain how or why this would happen.
Making information about prices available to consumers increases competition among shops and it would benefit the customers who take the trouble to compare prices on the shopping basket app, known as ‘e-kalathi.’ The more information there is about prices the stronger the price competition would be among shops. This measure if it operates correctly would help people cope with expensiveness practically, to an extent, and could push some prices down more effectively than the VAT cut.