“Price control!” Can’t we do anything else to defeat inflation?

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Antonio Guterres, the UN secretary general, warned on May 18 that in the coming months we will face the “specter of a global food shortage” that could last for years. According to Economist magazine, the high cost of staple foods has already pushed the number of people facing acute food insecurity from 440 million to 1.6 billion worldwide. As a result, “political unrest will spread, children will be stunted and people will starve.”

What does a government do to alleviate the pain and suffering caused by rising prices and shortages? In 1539, faced with a similar prospect and a cold winter, King Henry VIII of England advised Cromwell, his assistant: “They [the citizens] fear the winter, poor devils. Reassure them that in the event of a shortage, no one will take advantage of their distress. Proclaim a fixed price for grain if you must. Create a commission to investigate hoarding” (Hilary Mantel, The mirror and the light). Interestingly enough, food scarcity, profit, hoarding and the fixed price of food grains are themes that are still relevant today, even after nearly five centuries since then.

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With inflation spiraling out of control across the world and with no end in sight, it’s tempting to talk about price controls or mandatory price caps. Unfortunately, government price controls did not work very well in the past and also got a bad reputation in political and economic circles. However, with the inflation rate now nearing double digits and the price of essential items soaring every day, the public and many other quarters are looking for alternatives to bring down the price level, or at least, to to master. So what can be done and what is the alternative to price controls? Is there anything other than raising interest rates, producing more food and importing soybean oil, or using other measures that take a while to feel ? Central banks and the economists who guide them are aware that there is no magic bullet to kill inflation. But there is a range of policy tools available to government.

Many forecasters have said that the current cycle of inflation is “transitional” and once supply chain bottlenecks are removed and China starts manufacturing more consumer goods, things will return to normal. the normal. But that was over a year ago! There is nothing that hits the wallet of the average citizen harder than the rising prices of basic necessities. Moreover, there is no doubt that inflation is bad for the future of the economy and the political future of a governing party. Just as a threat from a foreign enemy or a national entity never fails to cause a party in power to mobilize its resources and react with all its might to combat these forces of evil, runaway inflation calls for action of the authorities.

The government of Bangladesh has taken up arms and tried to mitigate the impact of rising prices with an increased supply of commodities, greater subsidies and exchange rate regulation. But in vain. Taking action, the National Directorate of Consumer Rights Protection (DNCRP) last week fined 64 traders across the country Tk 9.18 lakh for their failure to protect consumer rights. The media reported that the management issued fines during market surveillance activities in 33 districts across the country, including Dhaka. This is all price control in practice.

However, price control remains a delicate area. A government cannot really regulate the price of goods in the market and any effort to exercise “command and control” tools to maintain the price of gas at the pump, rent for middle and lower middle income classes and everyday consumer prices (for food grains, edible oils, sugar, meats and lentils) may eventually come back to haunt the country sooner or later.

Still, the government must exercise its authority to keep tabs on essential items, bolster its watchdog cells, provide subsidized basics to low-income consumers, and use “moral suasion” to keep traders online. Price controls are bad, but the government has many other tools at its disposal to ensure price stability.

Moral suasion seeks to persuade, rather than force, an entity to act in a certain way through rhetorical appeals, persuasion, or implied threats. In economics, moral suasion is more specifically defined as “the attempt to coerce private economic activity via governmental exhortation in directions not already defined or dictated by existing statutory law” (JT Romans, “Moral Suasion as an Instrument of Economic Policy”, The American economic journal).

The only country that has had any luck with long-term price controls is China. The inflation rate in China was 2.39% in 2020, 2.9% in 2019; 2.11% in 2018; and 1.56% in 2017. CPI forecasts for 2022 and 2023 are 2.2 and 2.3% respectively. Clearly, China has “tight state-dominated controls over its economy, which allows it to manage inflation differently than other countries. In China, changes are being made to subsidies and other price control measures to control inflation”.

How to control inflation in a market economy? There is no easy answer to this vital question. Today, every politician and average citizen is asking and looking for an easy solution to inflation. How to lower the price of soybean oil? Well, allowing more imports would be an easy answer. What about the price of food? Well, you can’t ask for an immediate increase in the supply of grain, meat, edible oil, sugar or lentils. Because, as we all know, these solutions don’t really solve the problem overnight, with the war in Ukraine, the depreciation of the taka and new supply chain bottlenecks. The government’s objective should be to manage the current crisis and overcome immediate obstacles through a prudent mix of macroeconomic policy, reduction of tariffs on commonly used imports and regulatory directives.

Unfortunately, there is no easy path to price stability in the current volatile environment. Market forces are at the helm. Some prices go up and down, others just go up. Take the case of gasoline or crude oil.

When the supply is abundant, the price drops. On the other hand, as we have seen over the past 50 years, when there is a war in the Middle East or oil-producing countries experience domestic turmoil, the oil market is on fire. Fortunately, these should be temporary and things calm down. By contrast, prices of electronic items have fallen in real terms. For Bangladesh, the prices of many imported items have recently come under upward pressure due to global shortages, the devaluation of the taka and some degree of market influence by traders or unions.

The warnings from Guterres and the Economist Intelligence Unit quoted at the start only strengthen the hands of policymakers looking for directions or avenues for market intervention. In a recent decision, the High Court of Bangladesh advised the government to take steps to curb unions that manipulate commodity prices.

Dr Abdullah Shibli is an economist and works for Change Healthcare, Inc., an information technology company. He is also a Senior Fellow at the US-based International Institute for Sustainable Development (ISDI).

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