Cooking the Books 1 – Must prices rise?

The Times (22 October) reported Alan Jope, the CEO of Unilever, warning that the price of many household goods would have to go up:

‘He highlighted how the cost of palm oil – the Anglo-Dutch company uses a million tonnes a year in its Dove soap and moisturisers – had increased by 82 per cent in two years due to labour shortages in Indonesia. Soya bean oil, used in its Hellmann’s mayonnaise, had risen by two thirds due to poor crop production in Brazil.’

To say that in such circumstances sellers are ‘forced’ to put up their price is misleading. Faced with an increase in the cost of producing their product, a seller cannot simply decide to increase its price to compensate. They could try but, if they misjudged the market, they would end up losing sales and profits. If the market won’t take an increase, they have to lump it and take a cut in profit margins.

As the Times went on to report, the supermarkets selling Unilever products won’t necessarily be able to pass on any price increase to buyers:

‘A retail source said that the intensely competitive food retail market meant it was hard for supermarkets to pass on higher prices, as shoppers might desert them for the likes of Aldi or Lidl.’

In short, when costs go up, it is the law of supply and demand that will bring about any price increase, but only as long as demand is maintained. Businesses do not have a free hand when it comes to fixing prices; it is the market that decides.

There is, however, one circumstance in which prices must go up. As long as it is government policy to depreciate the currency, the general price level has to increase. The reason is simple. Prices are expressed in a unit of currency and, if that unit depreciates, then more units will be needed to express a price.

It is government policy, not just in Britain but co-ordinated with the other members of the G7 (USA, Japan, Germany, France, Italy and Canada), that their currencies should depreciate by around 2 percent a year. They don’t put it that way but that is what it is. They present it as keeping prices from rising above or falling below this figure.

The justification for this is that a slowly rising price level is the best situation to encourage firms to invest and consumers to spend. Falling prices (which, due to increasing productivity, would otherwise be the case) would mean that firms and people would tend to hold off spending in the hope of a lower price. This is not always necessarily true as capitalism can, and did until the outbreak of WW2, function with falling as well as rising prices.

But Keynes noted another advantage for employers:

‘Keynes expressed, in numerous passages in The General Theory, the view that wages were “sticky” in terms of money. He noted, for example, that workers and unions tended to fight tooth-and-nail against any attempts by employers to reduce money wages (the actual sum of money workers receive, as opposed to the real purchasing power of these wages, taking account of changes in the cost of living), even by a little bit, in a way they did not fight for increases in wages every time there was a small rise in the cost of living eroding their “real wages”’ (bit.ly/3qBbVbD).

It’s not workers that cause rising prices. That’s another problem they have to face, forcing them to run fast to try to catch up. Keynes’s other policies have been discredited and abandoned but not this one.

So, must prices go up? Yes, in the case of currency depreciation. Not necessarily, in the case of the cost of supplies going up.