Managing inflation
By P Gunasegaran, The Star
The authorities should watch what they say about inflation because of the danger of self-fulfilling prophecies.
There is an interesting hypothesis in economics called the rational expectations theory – the idea of which is that players in an economy are likely to behave as if an expected event has already happened.
That has wide implications in a country like ours where everyone is talking about an increase in the price of products, especially subsidised ones such as sugar, cooking oil, rice, flour, petroleum products, electricity and so on.
The consequences can be quite serious because if prices of these goods are raised, then there is a knock-on effect on a whole lot of other consumer products from your teh tarik, roti canai and nasi lemak to transportation.
Add to these the spectre of further increases in interest rates which a section of economists and other analysts advocate and you have a potent mix of factors that spell just one thing – higher prices all round and the dreaded inflation.
Let’s take an example. If sugar price is expected to increase then what will happen to sugar supplies. If you were a sugar supplier and you had a lot of sugar would you release all of your supply in the market if you expected prices to rise anytime soon?
Of course not. The suppliers who have their eyes on profit will hold out until the price increase happens and then the full supply will be released. Repeat the scene for a whole lot of scenarios, and the unpleasant big picture is hoarding and rising prices.
I am all for public debate almost all the time but when it comes to adjusting prices, the Government must keep its cards close – very close – to its chest and no one must be allowed to take a peek. Its much like a central bank keeping mum about what it wants to do about interest rates or the currency for instance – you know the card only when it is played and if you can help it, you don’t want anyone to second guess it.
By all means the Government can and should indicate that it wants to roll subsidies back as a long term aim, but it must not disclose or give clear clues as to what it is likely to do in the very short term.
It can invite debate on the topic, listen to all the various views, make its own research on the issue but it should not hint at what it is going to do. That means top government officials must seal their lips fairly tightly beyond saying what their long-term policy is.
When they have acted, that is the time for them to explain what they have done.
That is why the Government has in the past never said anything about an oil price increase until it was made. Now it looks like top officials who should know better are too hasty when they hint that a decision on whether to increase petrol prices will be taken by a certain date.
That must be a clear no-no because it smacks of hinting at what card might be dealt before it’s the Government’s turn to actually deal it, causing unnecessary speculation and hand wringing well before the date.
The best way to announce a price increase, especially of subsidised products, is unexpectedly and immediately. That minimises inflationary expectations and allows the economy to make a quick, if painful, adjustment.
Taking an unexpected blow, falling down, and then recovering is far preferable to living in constant expectation of one, which basically means you make your every move as if the blow will land. That considerably hinders your mobility and your ability to act.
Managing editor of The Star, P Gunasegaram, is tired of all this talk about raising electricity tariffs. Either do it or hold your peace.
