© Nadezhda Chipeva, Capital
In the conditions of continued increase in the price of basic foods and a pre-election situation, the political use of what is happening on the market does not stop.
BSP, unsurprisingly, continues to insist on a ceiling on the prices of basic goods such as bread, milk, oil, eggs, cheese, yellow cheese. The argument of the socialists is that this has been the practice throughout Europe and that the current government adheres to “market fundamentalism” by expecting the market to regulate the situation by itself, which was not going to happen.
The official authority, on the other hand, is increasingly distinguished from an intention to introduce a price ceiling, from an accusation that it is at war with the commercial chains or that it is trying to violate market principles. Therefore, lately this has been persistently explained, and the arrows are already aimed at commercial markups, without an element of administrative coercion.
Not a price cap, but markups. And not a ceiling, but…
Despite the claims of market fundamentalism that the BSP is leveling once morest the President’s office, it is a literal truth in economics that non-market restrictions such as imposing a price ceiling lead to distortions, the consequences of which are once more paid by consumers.
An increase in consumer prices is the result of two processes – an increase in demand combined with a lower availability of the good (or an expectation of a contraction in supply in the future), or an increase in the money supply. While the inflation of the end of 2021 was the result of the second process as a result of the post-pandemic recovery measures, in the early spring of 2022 the engine was rather the first process – the sanctions once morest Russia and the expectations of reduced fuel supply and food in the immediate future, remind in their analysis from the Institute for Market Economy.
Imposing a price ceiling would not affect either of these processes—neither shrinking the money supply nor increasing the supply of goods with rising prices. In other words, it in no way affects the real economic factors that push prices up, economists say.
Oil for political use
They remind that government price control is generally a temporary measure, because the government cannot maintain non-market values for long. This would lead to overstocking, i.e. deficits, before the expiry of this temporary measure. In order not to get to that point, such measures are often accompanied by restrictions on consumption. “The emergence of a black market, where scarce goods are available, but at their real, market prices, is not excluded. State-controlled prices can only affect the market in the open, but illegal trade is not bound by their compliance,” they remind the institute.
Can there be a cap on markups?
Because of the wave of comments related to the price ceiling, acting Prime Minister Galab Donev made a special clarification to reporters on Monday evening that it is not regarding a price ceiling, but markups. This logic continues the claim, which is contained in everything said on the subject by the authorities, that the reason for the high prices is contained in the behavior of the retail chains.
“We saw other countries that tried to introduce a price ceiling, that they failed, and other practices arose that led to more fatal consequences than what we propose,” added the prime minister, quoted by BTA. He also emphasizes that this measure does not declare war on the food trade chains, but it will only highlight unfair trade practices that harm the Bulgarian consumer.
The idea of limiting commercial surcharges was put up for informal public discussion some time ago, and over the weekend the Minister of Economy, Nikola Stoyanov, explained that it was not regarding setting a ceiling. He explained that it has not been decided yet, but the idea is to declare markups over 20 or 25% to the Commission for Consumer Protection.
The minister often says that the problem may not lie with the chains, but somewhere between them and the suppliers, and that the government is not at war with them, there is something else behind the markup percentage logic. Nikola Stoyanov says in a series of interviews that the markups actually reach 80-90%, and for some products it is several times. The explanation is that the gap between delivered and final prices is caused by what he calls reverse invoices. These include the costs of the chains to access them, to advertise the products, etc.
Already last week, the management of the only retail chain that came out with specific data regarding its way of working – Lidl Bulgaria – announced that it is not known that anyone in Europe imposes such ceilings, nor can it be said how, in practical terms, it will this happens. Ex. the director of the company, Milena Dragiiska, pointed out that in order to monitor this, the chains should appoint more people to check which markup is what and to notify the control authorities if necessary, and the latter should also appoint more people to deal with the avalanche from this information.
“It is very difficult for this to happen,” believes Petar Ganev, senior economist at the Institute for Market Economy. In turn, he points out that it is quite complicated to do such monitoring for each specific commodity. “Roughly speaking, the line is struck more generally, and not for each individual product, regardless of whether it is a large or a neighborhood trader,” he commented to BNR.
He adds that the most expensive goods – eggs and dairy products – are mainly sold outside the chains. It cites figures that say only 35% of that group trades there. The rest are realized through direct sales – from dairies, through farmers’ markets or company stores.
According to him, part of the problem with prices and their discussion is due to the political chaos and the frequent change of rulers in the last 2 years, and we should rather talk regarding commercial practices and regarding solutions that meet the real challenges.
According to him, the measures should rather be to investigate whether there is a cartel in the market, which can also be done with an initial analysis, which is not necessarily done by the CPC. “The investigation goes through an analysis of the movement of the final prices in each and every object. There are quite a few models through which to see if there is synchronized behavior. But they do not do that, officials look at labels,” he concludes.
Are they putting ceilings in Europe?
Economists who follow what is happening across Europe point out that there are different practices in response to high inflation, which has affected different countries to different degrees. Some of these measures involve more state intervention, as the BSP insists on.
An emblematic example of the latter was Hungary, which already in 2021 introduced a ceiling on the prices of petrol and diesel, and then in 2022 it did the same for basic foods – milk, eggs, flour and even housing rents. Data from Statistics Hungary itself showed that the average inflation for 2022 was 15%, and in December alone – 25% on an annual basis. In the case of food, the price increase is even 45%. For dairy products and eggs – up to 70%, according to the Institute for Market Economy. The reason is that immediately following the ceiling falls, prices very quickly reach their market levels.
The other juicy recent example is with the agreements between the French government and some of the local retail chains. There is no mention of a price cap or any other form of government regulation.
Grocery retailers have agreed to offer customers the “lowest possible prices” for a three-month period on a range of products of their choice. Read more regarding it here.
The practice of the chains themselves and outside of these turbulent times is such that every week separate groups of goods, among which the most food, are on promotion. And besides, the promotion is valid for a certain quantity. Signs with this clarification began to appear on shelves and in brochures following consumers trying to buy oil on promotion crowded into a store, which led to the death of an elderly consumer.
