The Tribune

• Sir Franklyn: Policy ‘only plays well in fooling people’

• Bahamas’ revival threatened as US hits 40-year high

• Consumer protection chief urges: ‘Buckle our belts’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Price controls will “do nothing” and prove useless against the “staggering” cost increases facing all Bahamians after US inflation yesterday surged to a 40-year high, a businessman is warning.

Sir Franklyn Wilson, the Arawak Homes and Sunshine Holdings chairman, told Tribune Business that while such measures “may play well in fooling some people” they will prove ineffective in holding back the across-the-board price hikes heading The Bahamas’ way.

Describing January’s 7.5 percent year-over-year increase in US inflation as “terrible news” for consumers and businesses alike, he added that the magnitude of this increase now posed a “significant” threat to The Bahamas’ post-COVID economic revival prospects.

Urging both the Government and its political opponents to be “truthful and honest” with the Bahamian people about inflation’s likely impact on their daily lives, Sir Franklyn said this nation’s status as a small, open economy that produces very little and imports virtually all it consumes means that - in the short-term at least - it is a price taker and can do relatively little to mitigate the effects.

While many may look to the Davis administration for salvation, he argued that increased government regulation and controls will prove ineffectual and may even backfire by making an already-bad situation worse.

“There’s no point talking about price controls,” Sir Franklyn told this newspaper. “Price controls don’t work other than to agitate the political base. Price controls do nothing.... A policy talking about price controls and things like that may play well in fooling some people, but it makes no sense in terms of effective policy.”

He cited the Rent Control Act as an example of price regulation that had created unintended consequences. “A major impediment to the construction of rental homes in this country has been rent control,” the Arawak Homes chairman argued. “The Government will do well to abolish it.

“Rent control has the effect of discouraging investors to go into rental properties. There was a time in this country when high-profile investors were significant players in rental properties and they’re gone. People like Gerald Cash were significant investors involved in properties and rent control helped kill it.”

The Rent Control Act limits the annual rent charged for a leased “dwelling house” to 20 per of its assessed value. Merchants, too, have frequently hit out at what they view as an antiquated regulatory mechanism, but cost of living increases will likely create growing public pressure for price controls to be extended beyond “breadbasket” foods and other items in their existing remit.

Price controls were initially imposed by the Government to prevent what it viewed as a unscrupulous merchant class from exploiting lower income Bahamians by unreasonably hiking the price of food staples and other products, thus placing them out of reach while undermining living standards.

However, opponents argue they are an out-dated and distortionary mechanism that create more unintended consequences than problems they solve. They can result in product shortages, while retailers and wholesalers have to increase prices and margins on non-price controlled items to compensate for selling these goods as effective “loss leaders”.

Michael Halkitis, minister of economic affairs, recently argued that the Government “cannot control the market” when asked whether it planned to expand price controls as a measure to combat inflation.

This prompted Carlyle Bethel, the head of the Free National Movement’s (FNM) Torchbearers, the party’s youth arm, to interpret this as a sign the Government will “take a completely hands-off approach and turn a blind eye” to the impact food price hikes and other cost increases will have on Bahamian living standards.

However, Sir Franklyn argued that The Bahamas’ status as a price-taking importer meant there was little any government can do. “The politicians ought to be truthful and honest,” he told Tribune Business. “On the Government side, they have to be careful about what promises they make because the banks, the lenders and the rating agencies are listening.

“Those in the Opposition are talking about food prices as if they have amnesia. They were just in office, and the leader of the Opposition was minister of agriculture. Maybe he can tell us what he did about food security during his tenure.

Sir Franklyn was last night backed by Walter Ferguson, the Consumer Protection Commissioner, who also indicated there was little The Bahamas can do to combat the global inflationary surge.

“One of the biggest challenges in our country is that more than 90 percent of our goods are imported. Due to the supply chain disruptions, bad weather, staff and trucking issues in our number one source market, the US, our prices will rise,” Mr Ferguson said in a statement.

“Inflation has hit the US by 7 percent, so you can only imagine what is going to happen here in The Bahamas. We are looking at staggering price increases. There is no way, at this time, to control this global environment. What we will have to do as Bahamians is buckle our belts, tighten up and buy what is needed more than what is wanted.”

In fact, US inflation as measured by the Bureau of Labour Statistics hit a 40-year high in January 2022 with a 7.5 percent year-over-year increase. The 12-month rise in the US consumer price index (CPI) survey, which measures the costs of a wide variety of goods, was the largest since February 1982. It also rose by 0.6 percent month-over-month compared to December 2021.

The US food index rose 0.9 percent in January following a 0.5 percent increase in December, according to reports, while the energy index also increased 0.9 percent during January 2022. Even after stripping out volatile food and fuel prices, US inflation still rose by 6 percent on a yearly basis. Used cars prices were 40.5 percent higher in January, while housing costs were up 4.4 percent.

Inflation’s impact at home is likely to be worsened by The Bahamas’ consumption-based tax structure, which means that import tariffs and border VAT - which are charged as percentages - will also increase. The amount of VAT dollars paid by the end-consumer will also increase.

The one mechanism at the Government’s disposal to mitigate inflation’s impact is to thus reduce taxes on essential commodities, such as food and fuel, but it is highly unlikely to do this as the post-COVID fiscal crisis means it needs every cent of revenue it can get.

Inflation, described as a sustained rise in prices across the board, devalues savings and causes particular problems for those on fixed incomes such as pensioners. It also raises the cost of living, reduces living standards and narrows disposable incomes, with those less well-off inevitably hit hardest.

And, with many Bahamian households still struggling to rebuild jobs, livelihoods and incomes following the COVID-19 pandemic, the spectre of inflation could not have emerged at a worse time. It will also likely result in increased demands on the Government for social assistance.

“It’s terrible, terrible news,” Sir Franklyn said of rising US inflation. “For consumers it impacts pretty much everything that you’re buying. In so many things that we do it’s a real downer.

“With inflation the way it’s going, just the impact on house prices, given the time taken between paying the deposit and constructing the home, a company like Arawak Homes has got to figure out a way to get that [inflationary impact] into the price.”

Inflation has been sparked by a combination of surging global demand and COVID-induced supply chain disruption, with lockdowns causing manufacturer order backlogs, container shortages and and a disrupted shipping industry. A shortage of truckers and freight yard workers in the US has only exacerbated the problem.

“What makes the problem worse is that we’ve had such a long run of price stability,” Sir Franklyn added. “A lot of us have forgotten how to deal with this. It’s been a non-issue for so long. It was a non-factor. Now it has reared it’s head and, quite frankly, very suddenly. I don’t know how many people professed they could see it coming at this depth.

“There’s no spin on this thing. It’s bad news. What makes it worse for us is that the economy is just showing signs of really recovering. The timing is really terrible. Every way you skin the cat it’s bad news. The impact will be significant. There’s no two ways about that.” And in an economy where it is estimated that two-thirds of GDP is driven by consumption.

The Consumer Protection Commission, in its statement, said it will monitor inflation’s impact “and ensure that all local wholesalers and suppliers abide by the regulations laid out in the Consumer Protection Act and the Price Control Act”.

It called on Bahamians to safeguard their rights to receive the services/products and value expected in their purchases, and reminded persons to supply evidence in the form of receipts, warranties, contracts and e-mails - as well as an explanation of their grievance when making a complaint.

The inflationary surge is not unexpected. Robert Roberts, Super Value’s principal, warned earlier this year that higher food prices may be here to stay, with inflationary pressures lasting for an unknown length of time.

He added that the possibility of up to 20 percent price hikes “on most items” by year-end 2022 could not be discounted based on US inflation estimates and information he was receiving from suppliers in The Bahamas’ northern neighbour.