Let public benefit from price falls

Source: The Star, Friday November 21, 2008

TINKERING with prices is pretty dangerous business at the best of times especially if the customer is not paying the underlying market price for the product for whatever reason.

In bad times, it becomes explosively risky and the wrong move can have wide-ranging repercussions, as the government found out to its dismay when it hiked fuel prices by some 40% on June 5 and introduced a complex mechanism of rebates to mitigate the effects on some sections of the community.

The country has not quite recovered from that shock and because of prices being sticky downwards - difficult to come down when they go up easily – the impact on inflation has been very severe.

The fuel price and electricity tariff increases, combined with rapidly rising food prices at that time, pushed inflation to a record level in 26 years.

In June, the consumer price index (CPI – the official measure of price increases for consumer goods) was 7.7% higher compared with the level a year ago.

Not only were consumers hit by this directly as food and fuel prices soared, the higher costs would have suppressed economic activity, leading to lower growth in output of goods and services and hence incomes as well.

With 20/20 hindsight, that move to hit Malaysians with a massive two-fifths jump in fuel prices at a time when food prices were already climbing, was disastrous, especially given the spectacular collapse of oil and prices of food components such as vegetable oil, rice and wheat shortly afterwards.

It is a painful reminder that the saying “What goes up must come down” does not apply to prices. Despite all the efforts of the domestic trade and consumer affairs ministry, prices have not budged much although costs of materials have fallen across the board.

That oil price hike represents a case study on how pricing policy should NOT be conceived and implemented and offers some important lessons for forward planning.

First, price shocks should be avoided as much as possible. A 40% increase in fuel prices represented at that time one of the largest single jumps in fuel prices anywhere in the world.

Inevitably, with such a shock, there will be expectations of high inflation and it will give the excuse for all and sundry to raise prices.

True, oil prices (see chart) were reaching new record levels almost everyday but the better thing to have done is to have opted for a gradual increase on the fuel price over a few months instead of trying to capture the effect of the increasing prices in virtually one go.

If that had been done, the government would not have had to increase fuel prices in one jump to the top of RM2.70 a litre for petrol from RM1.92 a litre on June 5 and then bring it down all the way to RM2.00 per litre earlier this week as oil prices fell.

With oil prices at record levels, the Government should have allowed for the possibility of lower oil prices shortly afterwards.

As it is, inflation has risen sharply and the higher costs of energy and poorer sentiment would have affected growth in output, an expensive lesson indeed for Malaysia.

But the Government does not seem to be taking lesson number two. If it wants prices to reflect the underlying market, it must bring fuel prices down when oil prices go down instead of only raising them when they go up – it must be a two-way process.

The public cannot be expected to put up with higher prices and then have the gains limited when oil prices fall.

The gains here must be passed onto the customer as well and not go to the Government through what are effectively increased taxes.

If you are removing subsidies, the fair thing to do is to remove the taxes associated with them as well.

One is hard put to understand why the Government wants to limit the gains to the consumer especially when passing on such gains will increase the disposable income, or money available for spending, of the man on the street. That will contribute to greater output as demand for goods and services increase.

We have already made one mistake when the oil price was going up. Let’s not compound that by making another one when the oil price is going down.

• P. Gunasegaram is managing editor of The Star. He says that the key to good policies is consistency in both word and deeds.