Inflation: The Solution is Monetary and Fiscal Anchors, Not Anchored Prices

A young married couple stopped by a neighborhood store of a retail chain after work. They exit with two bags of items. At the exit, they are intercepted by a serious-looking man. He pulls out an inspector’s badge and asks to see their receipt. The confused customers glance at each other but breathe a sigh of relief when they remember the campaign ‘No receipt, no deal‘. They hand the receipt to the inspector.

He scans the receipt. After about ten seconds, he says: ‘You are in violation! You purchased 15 items in this store, but only four of the cheapest are in the neighborhood. The other 11 should have been purchased in three other stores within a two-kilometer radius. This is mandated by the Consumer Responsible Behavior Act that came into effect two weeks ago. You have price data on the website. Before purchasing, you must see where things are cheaper and buy there. This is how you fulfill the obligation every consumer has in combating inflation. You will now receive only penalty points, but if you repeat the violation, the fine is 100 euros.’

Buyer in the Service of the Government?

This is, for now, a product of the author’s imagination. But it is not without basis and does not mean that such a situation will not occur at some point. From October 1, retailers, hairdressers, family farms, and anyone selling to end consumers will have to display so-called anchored prices. The prices their products or services had on September 10. This should calm inflation. Consumers will be able to see where a particular shampoo, dishcloth, or toothbrush is cheapest. So, customers will go there to shop. And then retailers or hairdressers will stop raising prices.

As expected, buying from five stores in one day will be of no use. Consumers, apart from many pensioners who, pressed by a lack of money and an excess of time, do this anyway, will not voluntarily perform the task assigned to them by the state. So the next logical step is to mandate that items be purchased at the place where they are cheapest. For example, within a two-kilometer radius in cities or twenty kilometers in villages.

To bring inflation below three percent, one should no longer get a haircut in the salon they have been going to for ten years, but in the neighboring one where the haircut is 50 cents cheaper. Of course, knowing the irresponsibility of the local populace, the legislator would have to establish an inspection for monitoring responsible consumer behavior.

It is not fair to ask the Ministry of Economy and Sustainable Development to fight against inflation, as it actually lacks the instruments for that. So, they are going for anchored prices. Anchors are a well-known instrument in combating inflation. Monetary and fiscal anchors are applied, not anchored prices. However, for real anchors, courage and innovation are needed, such as that which the then Prime Minister Nikica Valentić had in 1993 with the exchange rate anchor against hyperinflation. Times have changed, the exchange rate is no longer an instrument, but it is now up to the current government to devise a firmer anchor than anchored prices. This is the job of the central bank and the Ministry of Finance.

Furthermore, the calculation of how much this new additional administrative burden will cost the economy is missing, and no estimate has been published on how much anchored prices will alleviate inflation.

When the Government abolishes a legal provision, it immediately quantifies it. In every company, there will be two hours less obligation per week. This is then converted into the cost of an hour of work, resulting in savings of several tens of millions of euros for the entire economy. But when a provision such as the obligation to display anchored prices for all products and services burdens every retailer, craftsman, and family farm with several hours of obligations, this is not counted in tens of millions of euros in costs. Now, in a short period, those producing plastic frames for displaying prices and making cards with three or four prices are receiving an enormous amount of orders. And what do they do? They raise prices. The result of introducing anchored prices to reduce inflation is an increase in inflation.

Impact on Productivity

The cost of introducing anchored prices and constant reporting to the state about prices, besides everything, clashes with the mantra from the Banski Dvori that the economy must achieve greater productivity and greater added value. The new obligation for companies in the B2C segment may force employees in stores, who restock shelves when not working at the cash register, to also change prices every day until eight o’clock. But it is more likely that employers will have to hire a few more people. Thus, productivity measured by revenue per employee will fall.

Now someone will say that who cares about retailers. But they will pass the additional cost of displaying anchored prices onto suppliers from the industrial sector. Thus, added value will fall there. Therefore, let us return to monetary and fiscal anchoring.