Inflation and price control

To those of us who believe in a free market economy, price control is a bad concept. It attempts to repeal the law of supply and demand. It tries to fix a problem by introducing the strong hand of government into the equation. Besides, sellers are prone to just withhold supply if they feel the set price ceilings will make them lose money. In the end, everyone loses.

But the market is not as simple as we think. There are times when sellers take advantage of situations and engage in price gouging. This was what the economist I wrote about last Monday found out and so recommended what she called strategic price controls. She showed data indicating that sellers, including car manufacturers, took advantage of the pandemic economic rebound to earn more profits and in the process, fuel inflation.

CNN Business reports: Multinational companies Colgate, Procter & Gamble and PepsiCo have raised prices by double-digit percentages over the past year, according to their first-quarter earnings reports, outpacing the US inflation rate.

The conventional approach to treating inflation is for the central bank to raise interest rates. But as explained in my column last Monday, it may be unnecessarily inflicting pain on ordinary citizens, and may not even work that well if there are other negative externalities present.

Too much focus on the demand side.  Take our case. The BSP had been “calling for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation.”

The BSP had been saying in polite bureaucratese that, hey you guys at the Department of Agriculture should get off your asses and deal with the food cartels responsible for the persistent high inflation rate. The onion cartel is one example, the sugar cartel is another. The retail prices of both commodities have gone sky high with no valid reason other than the curtailment of supply.

The House of Representatives conducted hearings that determined what had been determined by a DOJ probe team, headed by Usec Geronimo Sy, that there is an onion cartel and there are enough reasons to throw them in jail. Usec Sy’s report is eight years old and nothing happened. The Competition Commission didn’t act on it.

“Unless we destroy this cartel, this problem will haunt us again and again in the future. Putting members of this cartel behind bars will send the unmistakable message that the government will not tolerate any unfair trade practices that prey on the hapless consumer and farmers,” Speaker Martin Romualdez said.

Speaker Romualdez is now urging authorities like the National Bureau of Investigation, the Philippine Competition Commission, and the DA to work together and pursue the leads obtained in the congressional hearings to build an airtight case against the onion cartel.

The Agriculture department, notably the Bureau of Plant Industry had been remiss in assuring adequate supply of onion. The DA-Price Monitoring Office had been reporting on the steady rise in the price of onions until it hit P600 to P750 last December.

The onion cartel is particularly vicious. It victimizes farmers and consumers.

Marikina Rep. Stella Quimbo explained that since onion farmers would need cold storage to keep harvested onions fresh, traders are conniving with cold storage operators who would falsely claim that slots are already filled up. Traders would then urge farmers to sell their produce at lower farmgate prices, as it would be better to earn from the onions than to leave them to spoil due to the lack of cold storage rooms.

At a similar hearing at the Senate, it was revealed that the onions being sold in the market at P700 to P750 per kilo were bought from the farmers of Occidental Mindoro at a shocking price of P8 to P15 per kilo during the harvest season in April 2022.

Sen. Cynthia Villar, who chairs the agriculture committee, said in a Senate speech:

“Due to price manipulation, farmers suffered economic loss. Now, farmers are afraid to produce because they might not be able to get back their investments. With all the issues on smuggling, hoarding, profiteering and the cartel of agricultural products, it is baffling that no one is prosecuted.”

As for sugar, it is the same thing. But the sugar industry is connected all the way to the top. Even importation of sugar by favored traders without public bidding failed to bring down sugar prices.

On the standard price control being implemented by the DTI on prime commodities, here is a note from former DTI Sec Ramon Lopez:

“The SRP system of DTI works very well for basic grocery products and brands included in the system (around 210 SKUs or stock keeping units- specific brands and sizes) with 100 percent compliance at supermarkets and groceries.  Why 100 percent?  It’s because these retailers ensure that the manufacturers align their prices with approved SRP, if not, their products will be removed from the shelves by the retailers themselves or be penalized.  And stocks being removed from the shelves is a no-no for manufacturers as this will put to waste the ads and promo spent or investment behind the brands.

“Please note, SRP only includes specific SKUs, brands, and products used by the masa so they have cheaper choices.  It doesn’t include other brands and sizes (SKUs) in the same product categories that are considered premium.  So, consumers have a choice.  Manufacturers, thus, offer SKUs for the masa under SRP and have other brands and SKUs not covered by SRP.

“SRP is not effective in agricultural products because retailers do not cooperate.  Agri prices are driven only by supply and demand, especially at the palengke level (what’s delivered by suppliers and traders).  Thus, ample supply, whether local or imported, must simply be liberalized and assured at all times, to ensure competition at all market levels.”

I guess DTI is able to effectively implement SRP in manufactured products because they are dealing with visible manufacturers and supermarkets. Onions are manipulated by a shadowy cartel, already identified, but the DA refuses to dismantle them.

So, not all price controls are equal. Some are needed to make the free-market system work effectively and not prejudice the consumers.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco