Monday, January 5, 2015

Why Aren’t Prices Dropping With The Price Of Oil?

Seems reasonable that they should, doesn’t it (excerpt):

Food stall operators maintain cost of their fare despite drop in price of fuel

PETALING JAYA: Rises in fuel cost usually lead to higher cost of food in eateries but there has been no corresponding drop in the prices of food in restaurants, coffee shops and stalls in spite of the much lower prices of fuel today.

Operators are blaming this on suppliers charging the same rates while they in turn point their fingers at transporters.

The Pan–Malaysia Lorry Owners’ Association (PMLOA) has urged its members to follow the current trend in diesel prices to adjust transportation charges.

However, its president Jong Foh Jit said the margin of adjustment could not be indicated because of restrictions set by the Malaysian Competition Commission (MYCC).

“The descending price of diesel is based on the general trend of global crude oil price but how long this trend will last remains unknown,” he said.

Jong also urged the government to reduce the tax on spare parts and tyres.

Malaysian Indian Muslim Restaurant Owners Association (Presma) president Noorul Hassan Saul Hameed said members wanted to reduce food prices but expenses were still high.

“We are dependent on suppliers who have not revised their rates, even after fuel prices first dropped last month.

“We are ready to lower food prices as it will mean more customers and profits but we cannot sustain the charges put on us by suppliers,” he said.

The price of RON95, RON97 and diesel was revised to RM1.91, RM2.11 and RM1.93 respectively from Jan 1.

Under the managed float system introduced in December, RON95 and RON97 were priced at RM2.26 and RM2.46 per litre respectively, while the price of diesel was RM2.23 a litre.

Noorul Hassan urged suppliers to be more responsible and be open to discussions with restaurant owners on how to reduce prices.

Everybody is blaming everybody else, and nobody wants to give in. Here’s my considered opinion on why prices aren’t coming down:

It’s your fault.

Or to be more precise, since input prices (including wages) have all gone up in response to the initial oil price shock(s), the cost of production is now much higher even when the price of oil falls back.

The simplest way to see this is to look at just one input price, and typically the most important one – labour. Most people think of wage increases as a reward for labour growth and productivity. Actually, this is only partly true – some portion of wages is due entirely to inflation. The increase in the cost of living prompted wages increases, which in turn made the changes in prices more or less permanent. Add in the impact of the minimum wage, and we’re unlikely to see prices drop much if at all.

Wages are fed by, and in turn feeds, inflation. When Bank Negara raises interest rates to contain inflation, what it’s really trying to do is contain wage growth in excess of productivity growth.

Now obviously there are and will be winners and losers in this kind of price adjustment process. The drop in the price of oil is boosting someone’s margins, even if nobody is admitting to it. But this goes both ways – overall prices never rose to the same extent as the increases in the price of oil. And businesses also have to handle input price, and therefore profit margin, volatility. Wages are nearly always the only component that is non-volatile (for obvious reasons), and hence the most persistent.

It’s no accident that price increases have been highest and most persistent in food-related service industries.


  1. It's been awhile since my last comment.

    But here's my take...
    Misaligned inflationary expectations.

    I think over the longer run, a re-alignment is likely...i.e. a convergence of wage and inflationary expectations.

    More exogenous price distortions might prevent that.

  2. From microeconomics side, inelastic dd curve from consumers that are unresponsive to change in price means no incentive for restaurants to lower their prices. Assuming they are profit maximising entities, they should charge as high as market clearing price.

    i.e. Its still your fault. Haha.

  3. I think Austrians wouldn't mind taking a pay cut. So, it's not their fault. They love deflation!