Which to stabilize: food or petrol?
Should the government introduce a food price stabilization policy? I ask because rising petrol prices have led to a campaign to drop the planned increase in fuel duty, and to introduce a fuel price stabilizer. But this raises the question: why should the government stabilize petrol but not food prices?I ask because, for the average family, it is food prices - more than petrol - that is squeezing their living standards. This is because food has a greater weight in spending than petrol (9.6% vs. 4.1%), and so food’s 4.9% increase in the last 12 months has raised CPI inflation by more than petrol’s 10.1% rise. (Table 3 of this pdf.)And for the poor - who can’t afford cars and who spend proportionately more on food than those on higher incomes - food prices are obviously a greater problem. So, why is there a clamour to stabilize petrol but not food prices? I can think of five reasons. I’m not sure how good they are:1.Petrol prices are more volatile than food - 3.2 times, according to monthly data since 1996. This means that, even allowing for petrol’s smaller weight in the CPI, its variability generates gerater volatility of real incomes. 2. People can do more about rising food prices than rising petrol prices. For some, reducing food intake is feasible and desirable, but at least some car journeys are necessary. For many, though, this is not true: higher food prices might lead to worse health, if people switch to cheaper empty-calorie fast food. And in the long-run, people should live nearer to where they work. 3. Because fuel duties are high, petrol prices are set by government whereas food prices are not, so people regard petrol prices as a legitimate object of policy whereas food prices, fluctuating “naturally”, are not. This is an example of how government intervention can feed on itself - one intervention (a tax) leads to demands for others (price stabilization).4. There’s a displacement activity going on. You might think that there’s a difference between those for whom petrol is a large expenditure and those for whom food is. The latter are often on benefits, and so are protected from rising food prices (with a lag - which means that cashflow can be a problem) by the index-linking of benefits, but the former are not. But this difference is illusory. In principle, petrol consumers have a form of index-linking. They can pass on price rises to customers or employers; the CPI is still the benchmark for wage settlements. And this is where the displacement comes in. The people for whom rising petrol prices are a problem are those who lack the market power to pass on the cost - small haulage firms or workers without bargaining power. Rather than acknowledge their lack of power, though, such people prefer to present themselves as victims of government. A problem of capitalism thus becomes a problem of big government.5. In our quasi-democracy, government heeds the calls not of those with the most need, but of those with the most voice. And white van man makes more noise than the genuinely poor. Another thing. The Mirror says rising petrol prices will cause “misery” for millions. Is this is journalistic hyperbole or a sad truth about our emotionally incontinent society?Yes another thing. The Bank of England is not going to raise rates simply because of rising petrol prices. It might do so if they lead to higher inflation expectations.