Saturday, February 04, 2012

Why prices stay up when costs go down

WHILE the media often reports on price rises in essential items and foodstuffs such as rice, wheat and coffee, subsequent falls in the prices of such items are reported less diligently, affecting the country's fight against inflation.

For instance, in 2010, the media rushed to report on the doubling of onion and garlic prices owing to bad weather in China and India.
Housewives hoarded onions and garlic and restaurants raised their dining prices.
And around this time, coffee shops increased the prices for coffee and tea citing a hike in commodity prices.
Today, garlic and onion prices have crashed to prices below those publicised in 2010 because of good weather, and the increased planting brought about by the earlier jump in prices.
Prices for tea and robusta coffee, the kind normally used in our daily heartland cuppa, have fallen by up to 15 per cent.
However, the media has been silent on such drops in prices, and restaurants and coffee shops have not reduced their menu prices despite the lower costs.
It may interest readers to know that cocoa prices had fallen by 50 per cent between March and December last year.
Yet, I doubt if we shall ever see Cadbury's 250g chocolate bar again, although the cocoa price spike was given as a reason for reducing the per bar weight from 250g to 200g, while the price per bar stayed the same.
Rising raw material prices are often cited as the reason for increasing the prices of end-use products. This contributes to a higher rate of inflation in Singapore.
Failing to publicise falling commodity prices is detrimental to consumers' welfare, as they are not kept informed of actual market conditions and prices, and suffer higher household expenses even when the reasons for the price increases have diminished or disappeared.
Reporting on commodity price trends is difficult and speculative. But one-sided reporting of just price increases - without alerting the public when prices drop - will feed into increased expectations of businesses and the acceptance of higher food costs by consumers, to their own detriment, and fuel inflation.
Lim Wei Jan