Monday, June 06, 2005

Increasing prices - what's the cause?

Khaleej Times seems to have trouble, here and here, getting its head around the reasons prices for groceries can increase even if wholesale prices have not changed. Demand is being pushed up by a rapid growth in population and by the growth in the country's income from oil due to the steep increase in world oil prices. An increased demand leads to an increase in retail prices at groceries even if the wholesale prices have not changed. Some groceries are experiencing above normal profits. Others are seeing their profits squeezed as the building rent for the store increases. The increase in commodity prices is the normal working of a market, not exploitation. The profits the groceries experience will attract entrants and supply will grow with time. However, because the rent for retail space has increased, retail prices for groceries will not return to their previous level.

The policy recommendation, then, is for the government to examine whether it has unnecessary regulatory barriers to the entry of new grocers and the expansion of existing ones.

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