Possible need for price controls

‘The Reagan-era policies also paved the way for China’s rise. As Weber’s scholarly work shows, China’s economic strategy in the 1980s relied on price controls with slow adjustments, similar to the US policies of the 1940s. Then, in the 1990s, as Russia’s economy collapsed following “Big Bang” price liberalization, China continued on its gradual path, allowing its industry to mature as America’s declined.’ – An excerpt from a January 21, 2022 Project Syndicate (PS) published article ‘The case for strategic price policies’ by James K. Galbraith

Although it has been a number of months since policy rate in Pakistan was set beyond 20 percent at 22 percent, and it has been around two years that it was raised into double digits, but inflation still also saw a lot of increase, and even as it decreased, there has been a lot of stubbornness in its decrease.

For instance, during February 2023-2024, consumer price index (CPI) inflation year-on-year (y-o-y) increased for six of those months – March, April, May, September, November, and December – and the average y-o-y increase in CPI inflation saw an increase of 2.2 percent. On the other hand, for the other six months – June, July, August, October, January, February – y-o-y CPI inflation decreased on average by 3.6 percent. So, while there is a decreasing trend in CPI inflation this year – with substantial decrease in February of 5.2 percent – overall there has been a net decrease of only around 1.4 percent. Overall, CPI inflation, which stood at 31.5 percent in February 2023, and increased to a maximum at 38 percent in May, had only decreased to 28.3 percent in January 2024 – with minimum during this time reaching 26.8 percent in October 2023 – and it was only for a significant decrease by 5.2 percent in February 2024 that it reached 23.1 percent. Even so, inflation did not see a consistent decline during February 2023-2024 as indicated above, and the overall decline in inflation would have been only 1.1 percent, if not for the month of February this year.

It clearly indicates the much less impact of policy rate in terms of reducing inflation, given how high a level it has been, and how little the decrease in inflation over the entire year (that is over February 2023-2024). Moreover, a high policy rate would have likely contributed to cost-push and imported inflationary channels, which, in turn, would have likely added to inflation showing a lot of stubbornness during the same time.

Also, the global aggregate supply shock factor has quite decreased since the elevated heights it gained in the heyday of the pandemic, so the continuation of significant levels of stubbornness in inflation decrease, in turn, points towards a number of other causal factors likely working in a significant way such as over-board practice of monetary austerity, producing both lack of economic growth due to the deep growth sacrifice this otherwise, unjustified fiscal consolidation, or aggregate demand squeeze policy has incurred – given inflation has a significant aggregate supply determination in overall inflation – producing lack of needed increase in aggregate supply, and increase in interest payments on debt, taking away, in turn, resources, which could otherwise be spent in enhancing domestic production, and exports. Other important factors could be over-profiteering, and a lack of price controls in place to check this phenomenon.

It is suggested that a ‘price commission’ is formulated at the earliest so that over-pricing and over-profiteering are checked, especially for goods and services of significant importance for the economy overall. Moreover, the proposed commission may underscore or explain the criticality of price controls.

Here, it needs to be pointed out that sensitive price index (SPI) during the same time period – February 2023-2024 – which includes goods of the nature of daily usage, also have a trend which is not different from CPI in terms of overall decrease during this time, while it increased a lot more than CPI. Both these counts show that given the lack of financialization, the role of policy rate is significantly limited when compared with CPI – although there too it is a lot less than in advanced countries – and while some input costs like energy price did contribute to prices in SPI, yet the more-than-increase as compared to CPI, and given the build-up in terms of easing global aggregate supply shock, SPI inflation should not only have increased less than CPI, it should have fallen more drastically. This clearly underscores the need for checking over-profiteering in these sectors on which SPI is based, and placing price controls where needed.

To quantify SPI trend, in February 2023 y-o-y it stood at 33.6 percent – similar to CPI at 31.5 percent, but then it increased a lot faster than CPI, and while in May 2023, CPI had increased to 38 percent, SPI had risen to 43 percent. At the same time, it increased for seven months – March, April, May, September, October, December, January – with the most increase of 6.8 percent in March 2023, while the average overall increase for February 2023-2024 stood at 3 percent; a little more than 0.8 percent that average increase in CPI for the same time period. On the other hand, average decrease in SPI stood at 4.9 percent – which was more than the average decline in CPI by 1.3 percent. Having said that, y-o-y SPI inflation still stood at an elevated level of 30.4 percent in February 2024; much higher than CPI at 23.1 percent in the same month.

It needs to be indicated here that in even developed countries, which in general have a lot more financialization than developing countries like Pakistan, and have much significant say of policy rate in determining inflation, there has been a serious discussion on the need of placing price controls, given the increasingly strong apprehension of producers taking advantage of existential threats in particular, and an overall presence of polycrisis situation created supply shocks.

Noted economist Isabella M. Weber, in her July 13, 2023 PS published article ‘Taking aim at sellers’ inflation’ pointed out in this regard: ‘Key officials have acknowledged that profits have been a major source of inflation in Europe – a realistic position informed by facts, rather than by the economics of the 1970s. Now that they have embraced a new analysis of what’s driving inflation, the policy response should change, too. In recent months, the European Central Bank, the OECD, the Bank for International Settlements (BIS), and the European Commission have all published studies showing that profits have accounted for a large share of inflation. But the coup de grâce for doubters came on June 26, when the International Monetary Fund tweeted: “Rising corporate profits were the largest contributor to Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy.”‘

It is amazing then to say the least, as to why there is so little focus on dealing with over-profiteering in policy discussions of both government, and the International Monetary Fund (IMF). This needs to be rectified in the upcoming discussions for a possible Extended Fund Facility (EFF) programme, and it is hoped that the need for establishing a ‘price commission’ will be meaningfully felt to both check over-profiteering, especially in sectors reflected in SPI, and suggest application of price controls in goods and services where needed.

The same article from last July highlighted the comments of Christine Lagarde with regard to over-board profits ‘As ECB President Christine Lagarde told the European Parliament on June 5, “the contribution of profits to inflation … had gone a little bit missing,” because “we don’t have as much and as good data on profit as we do on wages.” Policymakers failed fully to appreciate the “transmission of the cost-push that was suffered by many corporate sectors into final prices.” But now, the problem has come clearly into view. While some sectors “have taken advantage to push costs through entirely without squeezing margins,” Lagarde explained, others have gone further to “push prices higher than just the cost push.”’ With less regulated markets, and far less effective governance structures to check pricing, developing countries like Pakistan have all the more cause to have a ‘price commission’ to analyse the likely existence of over-profiteering.

Moreover, in her most recent co-authored article ‘Who’s afraid of price controls’ published by PS on March 26, 2024 the case for placing controls is built as follows by Isabella and Tom Krebs as: ‘Is it time to consider adding price caps to the emergency economics toolbox? The unprecedented surge in energy prices that followed Russia’s invasion of Ukraine has prompted much soul-searching in Europe regarding the effectiveness of traditional economic-stabilization policies. In response to this energy shock, the European Union has imposed a general price cap on natural gas, and several member states have capped profit margins, staple foods, and rents, in addition to reintroducing windfall taxes. …While mainstream economists often reject price controls outright, arguing that they are invariably suboptimal, the price uncertainty inherent to geopolitical mega-shocks like the war in Ukraine underscores the need for governments to reconsider their assumptions.’

Copyright Business Recorder, 2024