Have traders been inflating prices artificially?

It was mentioned in the news yesterday morning that certain traders, having a foreknowledge of impending visits of members of the ‘Observatoire des Prix’, would have resorted to a clever device. They would have lowered the prices of commodities of common consumption the time of this visit in their shops, only to put them back at the previous higher levels immediately after. In the circumstances, those shops would have been marked up as the ones offering lower prices to consumers compared with others.

The report of the ‘Observatoire des Prix’ classifies shops according to whether they fall in the category of those which are higher priced or those who are lower priced. The effect is for consumers to go out to those which are supposedly posting lower relative prices to do their monthly purchases in a bid to strike a “good” bargain. It appears that there is no such bargain.

But let us take a deeper look at the issue of prices practised by our traders generally. Not many would recall that when a kilogramme of a particular brand of powdered milk saw its price rise from Rs 94 to Rs 97 some years ago, there was a general hue and cry in the media. Many were asking that the minister responsible for the sector should be fired. That was only for a price increase of Rs 3 per kg which those commentators were finding unjustified and therefore unpalatable.

Today, after some years, the same product is being sold at around Rs 195 per kg, a level at which it might have been arrested in view of felt consumer resistance to go on picking it. That is, the current normal price is nearly double the price at which it was being offered at that time! There is no hue and cry about this fantastic increase in price over a matter of some years.

Generalised escalation of basic commodity prices

Consider the behaviour of prices at our shops. One can venture out to affirm that not only has the price of milk increased by that magnitude in the space of some years. There has taken place a generalised escalation of basic commodity prices across the board in all shops. All the products sold to the public have seen their prices inflated by a huge percentage during this interval, in quite a few cases by above 100%, but going up in frequent small doses. People have assumed that this must be normal and therefore they have kept squeezing out more and more rupees out of their shrinking purse to pay up for their regular purchases.

Others, the nouveaux-riches, who have seen their purchasing power increase during this period, have helped the shops to keep raising prices by picking them up unquestioningly at whatever prices they are being offered. In that sense, Mauritius has thus become a paradise for those adept in the art of continuous price escalation.

Ensuing high profitability of shops due to the recurring high and rising margins practised by the concerned shops has led to the proliferation of the bigger shops and shopping centres in all corners of the country. All this seems to indicate that consumers have been caught up in a frenzy of buying, if only to change over to new brands being introduced on the market at marginally lower prices than the competition initially, only to pick up once the customer base is firmly established.

Most of the shopping centres that have sprung up rely on local consumers who have been forking out money if only to meet the demands of a more sophisticated palate or to buy up newer products than what they have been taking up customarily. The major consumer shops advertise reduced prices for a selected range of products at the end of each month. Customers rush to take advantage of such offers. Little do they realise that the so-called “reduced prices” are at the same level to which they had been previously jacked up a couple of months ago, even though lower than the prevailing higher price of the same commodity in other shops.

One must not make the mistake to believe that this practice of constantly jacking up prices is limited to goods of daily consumption. It spans across all the vectors of trade, including goods and services. Prices of motor vehicle spare parts, those of consumables in electronic equipment, pharmaceuticals, you name them, they are all following this very trend of constant price escalation.

Service cartels

There have been some exceptions, though, such as TV sets following custom tariff downgrade on the item; however, you just have to wait for some time more to witness in person the price jacking-up mechanism at work even in such cases. Sellers are after your purse: even where there is so-called competition, they arrange to groom up the product a bit to the level at which it normally should have been in a competitive market but the real idea is not to let the price slip by. This is how service cartels are realizing fantastic profits year-in-year-out.

We are therefore taking the view that there is an uncontrolled process of continuous price increase manipulation in the country, the gains from which would be feeding into real estate and house prices once unexplained earnings make their way from the official sector to find a berth in property with highly inflated prices. All this is not captured by the Consumer Price Index which targets a limited range of items affecting ordinary consumers.

Land which was selling a decade ago for no more than Rs 3,000 a toise in certain posh areas of the country has shot up to Rs 33,000 of late. It’s all interconnected, from the ordinary goods and services market to the property market. The spill-overs from one sector go to inflate prices in the other places. The system of price-jacking has been feeding upon itself in successive rounds. People don’t see it because they hardly have time to take a macro-view.

International price inflation

How much of all this is acceptable? One way was to look at the matter is to check import invoices to decide whether the domestic price rises we have been seeing are justified.  But invoices can be over-valued. To an extent, international price inflation of food and other items explains part of the price escalation we have been seeing domestically. But this is not enough to explain the constant jacking up of prices we have been witnessing.

Another way to verify the rising domestic price factor is to consider the exchange rate of the rupee. One can say fairly confidently that since 2006, when the rupee-dollar rate had been shot up to above Rs 30 per dollar (the currency in which the bulk of our imports are invoiced) from around Rs 27, it has not been allowed to depreciate in the range and scale of those days. It is still around Rs 32. The exchange rate cannot therefore be brought in to explain rising import prices.

Take the example of the South African rand in this context. We import quite some amount of our consumption goods from South Africa. So, the exchange rate of the rand is important. From Rs 4.25 a year ago, the rand has fallen now to around Rs 3.25. In fact, not only have the prices of consumption and other goods imported from South Africa not reflected the lower rate of the South African currency vis-à-vis the rupee; they have actually registered increases.

The solution to our constant exposure to rising commodity and other prices is to have an independent official body having the necessary expertise and information about price movements in different markets tell us from time to time whether specific domestic price increases are in line with international trends. This will act as a check on potential abuse by traders. We could also look to alternative cheaper sources of supply.

As for substitute domestic supplies of items which go up in prices, our agricultural sector has proved in the matter of supply of onions and potatoes at least, that it is not more competitive than those we import these items from. Whether we can instil more efficiency in such areas should form part of a bigger plan aimed at raising local levels of productivity.

* Published in print edition on 14 June 2013

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