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The Cure for High Prices…

…is high prices.

I got that headline from a recent newsletter by John Mauldin and it’s relevant today as oil companies say they will raise petrol prices by Rs. 3 per liter after May 10 (elections).

While this is bad for short term prices and for inflation measurements, this is really the only thing that will cure overheated prices. We can’t live with subsidised fuel forever – the only to make us reduce our usage, and thus reduce overall demand is to make it expensive for us.

Yes, there is some speculation driving crude prices up. Yes, the troubles in the middle east are a problem. But prices need to go up to compensate. Like Mauldin says:

The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat.

But it will involve short term pain. And I think the equity markets will be very badly hit, because we will have to slow down to perhaps 6% or lesser growth just to compensate (unless we fudge the data). Either ways, it’s a rough road ahead.

  • Anonymous says:

    >I dont feel that "high for high" attitude work these days. On one side, people are with lot of money and they want to enjoy whatever they wish, they will keep on buying; and on the other side, people who were already overburnt by the hiking prices, will stop buying. This cumulates as demand is stable and lead to continuous increase in pricing.

  • Anonymous says:

    >"Cure for high prices is high prices"
    This doesn't apply for essential life-sustaining goods and goods where there is supply chain bottle necks.
    If wheat price increases people don't stop eating. Also increase in production won't hamper price rise if it was due to artificial manipulation like hoarding.

  • Deepak Shenoy says:

    >Anon1: Good point.

    Anon3: life sustaining goods like …Petrol? Diesel? These are considered essential, in a way. For essentials, there are ways to deal with it – like what governments in EMs do is that they allow generics for life saving drugs so that they get access.

    Supply chain bottle necks are a different problem – you solve that problem, not try to manipulate the price. So if there's a wheat supply issue, you find ways to bring more wheat into the market (open up imports, bottle up exports, sell from FCI hoard etc.) but nto to set up a max price or something.

    Hoarding should be checked too – but in the end, the issue is that if we get insulated from high prices, we will only get hit at a higher level!