When the Ministry of Economy announced in May plans to cap or reduce the price of 400 food items in the UAE, consumers were delighted. Retailers, on the other hand, held their collective breath. Mandated price reductions are good for controlling inflationary pressures, but are tough on the bottom line.
Seven months on, the results are in and, as expected, the reception has been mixed. As The National's Business section reported yesterday, food prices in supermarkets are among the lowest in the developed world, but retailers are still taking it on the chin. As V Nandakumar of LuLu Hypermarkets explains it, the policy is "right for the population" but has "had an effect on our margins".
Affordable food prices, especially for people on limited incomes, are a great benefit during uncertain times. The question is how long the price freeze should be in place, and what are the preconditions for its rollback. When the plan was announced last spring, it was to expire at the end of the year. So far, however, all signs point to a continuation into 2012.
The UAE imports about 85 per cent of its food and is particularly vulnerable to global price swings. Until the middle of the year, food prices went in only one direction: up. The cereals price index maintained by the UN Food and Agriculture Organisation, for instance, jumped 71 per cent over the year before.
But in recent months, this index has stabilised. Higher wheat yields in Russia have helped to lower prices, and the FAO's Food Price Index, which measures the average monthly change in price for a basket of food items globally, is down by 10 per cent from February.
There is a downside to the price freeze. Manipulation of consumer prices distorts markets and squeezes smaller shops that are unable to compete. Moreover, larger chains and restaurants might cut quality or limit offerings in the face of thinner profit margins.
Price caps are blunt economic tools, benefiting everyone - from the wealthy executive to the street sweeper - rather than offering targeted solutions for people who are actually in need. Cheap food is popular. But in economic terms, it's worth remembering that there are costs to keeping prices artificially low.