Is this the way to fight inflation?

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Tariffs and price controls? Apparently, Latin America thinks it can stop the growing tide of inflation and end the riots on their streets by just imposing tariffs and imposing price controls. They better get ready for a blind date with Econ 101. But, I guarantee you this date won’t end well either.

The Financial Times reported yesterday “Mexico’s centre-right government on Wednesday announced the widest range of price controls in more than a decade in an attempt to curb rising food prices.” Inflation is spiraling viciously out of control around the world. Meanwhile, ordinary citizens are rioting in the streets because of the state of affairs.

Over in Argentina, they are using tariffs to deal with the problem. They are actually raising tarrifs on their own grain exporters to increase the money collected by the government as grain prices soar. The Financial Times says:

“A bitter conflict over the tariff regime, lasting nearly 100 days, has opened up deep divisions within the ruling Peronist party. Members of Congress from northern and central farm-based provinces will come under intense pressure from their constituencies to seek tariff changes.”
The FT, 18 Jun 2008

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In both cases, the government is trying to control the price and availability of basic foodstocks in the domestic market, insulating the population from the rising inflation around the world.

The experiment in Argentina has already led to food shortages and rising inflation, despite the official doctored inflation numbers. Obviously, this is the opposite effect of what policy makers are hoping to have.

In Mexico, I reckon the outcome will be the same, a food shortage. Price controls don’t repeal supply and demand; they artificially hold prices below the level at which sufficient supply can be met. This results in demand outstripping supply and food shortages.

Ultimately, these are two desperate attempts by emerging market governments to stem the tide of food inflation. If we don’t get this thing under control soon, we may be headed for trouble. I’m beginning to think rate hikes in the UK, US, Europe and Asia are inevitable.

Sources
Mexico imposes price controls on food, The Financial Times, 18 Jun 2008
Argentina tariff bill calms farming crisis, The Financial Times, 18 Jun 2008
Argentine inflation index under fire, The Financial Times, 11 Jun 2008
Argentina’s conflict over tariffs intensifies, The Financial Times, 23 May 2008
El conflicto del campo argentino se atasca, El Pais 3 Jun 2008

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