Inflation: Who pays the price? 


After quite a bit of beating about the bush, some amount of wage compensation for the loss of purchasing power due to inflation was granted on the day preceding presentation of this year’s budget. It seemed that it was given after a lot of effort. Those at the bottom of the income ladder were granted an increase of 3.2% against a presumed inflation rate of 2.7%; those earning above Rs. 30,000 a month were granted nothing. This meagre wage compensation was cast in the shadow of global economic uncertainties and the fact that running inflation at 2.7% was considered to be quite low, being well below the threshold of 5% for triggering compensation at all. Despite the protests of the unions and the opposition, no compensation was granted for cumulative loss of purchasing power due to under-compensation in previous years. Imperatives of economic management do not permit fairness on occasion.

A few days after the Budget, a number of price increases ranging from the price of edible oil to those of plastics, alcohol, cigarettes, electricity, bus transport, etc., have already come on the table. Others are said to be in the offing, such as those of domestic water supply, fuel, etc. Some of these price increases were triggered by the incidence of duties introduced in the Budget. Others appear to have been lying in wait to manifest themselves in a matter of days after the wage compensation was decided and after the presentation of the Budget. Barely a month after the Budget, it is clear that even those who have been granted compensation will be worse off when confronted with the ongoing price rises. The sheer 10% increase in the price of electricity will leave nearly nothing behind in the pockets of those who have been considered fit to receive compensation. Those who have been given nothing will have to dig into their pockets to pay up. The scales have tilted against them.

We do not have an exceedingly plausible track record with regard to keeping the rate of inflation under control. In the past five years, according to figures published by the Central Statistical Office, the annual rate of inflation in Mauritius has been as follows: 2005 – 4.9%, 2006 – 8.9%, 2007 – 8.8%, 2008 – 9.7%, 2009 – 2.5%. According to the Bank of Mauritius, it is expected that the inflation turnout for the year ended December 2010 will work out to 5.7% whereas by June 2011, it will have shot back to 7%, i.e., in the direction of the heights of the years 2006-2008. Thus, the low rate of inflation of 2.5% for 2009 was a simple outlier in a series of generally high annual rates of inflation.

In other words, in a country where importers are free to pocket the benefits of currency appreciation and not pass on the benefits of lower effective import prices to consumers due to this factor, whereas they are all too prompt to pass on without a lag (it appears they don’t carry an inventory of lower priced imports when currency depreciates) price increases occasioned by currency depreciation, there is no fair game. Consumers are exposed to face the consequences of the situation. There is always some ultraliberal economic doctrine which can be used to justify that the government should keep its hands off price controls even when traders resort to abuses of the sort. On top of this kind of mercantilist practice, local consumers are exposed to international price increases. For example, The Economist indicates in its Commodity-price index that food prices have already risen by nearly 20% at the international level in dollar terms in the past year ended early December 2010. External developments such as this also hit the consumer who has got used to a standard of living based on numerous imported food items. Events like this accentuate the adverse impact of wage under-compensation and force a majority workers to cut down on their standard of living.

Price inflation affects the consumer from yet another angle. We saw that the Monetary Policy Committee (MPC) of the Bank of Mauritius (BoM) took the decision in September last to lower interest rates by as much as 1% to help exporters. The effect was to bring down the rate of interest paid by banks to saving depositors by an equal amount; accordingly, whereas savers were getting about 4.5% p.a. on their savings previously (already a low level), they are now getting 3.5% as from September 2010, following the MPC’s decision. Taking the BoM’s current estimate that inflation will hit 5.7% in December 2010, the saving public is getting a worse deal, i.e., a negative real return of 2.2% (5.7 less 3.5%) on its savings.

One sees clearly from the above that it is the public that is being made to bear the brunt of economic adjustment. The public in Mauritius is not pouring money into the pockets of failed bankers who had run away with the spoils when the international economic crisis hit the West in particular. But it is nevertheless engaged in a process of losing money. It has to take from out of its reserves in order to face higher bills due to rising inflation uncompensated for by adequate wage adjustment. It is also seeing its savings being eaten away by a rising level of inflation in the face of reductions in the interest rate paid on its savings. If the public is made to make such sacrifices from time to time, it should expect to be rewarded justly when better time comes for industry and the government. Does it get its fair share of both rewards and punishments? Punishments, yes. As for rewards, that is not quite sure because there are others who grab the advantages faster. It will not be asking too much to say that someone should be looking after its interests as well. 

* Published in print edition on 17 December 2010

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