Expectations and Shocktrapy!

Every year, a month before and after New Year (which is 21 March in my country) we have a high inflation up to 30% including nearly all commodities and services. Why? Perhaps the direct and first answer coming to mind is because of high demand of consumers for commodities before New Year. This is partly true but it is not all the story for my country.

According to above answer, the ministry of commerce performs a policy to inject the highly demanded commodities (highly demanded for New Year) into market (think about supply law) in order to keep prices constant. Does this policy works? No, I think the second answer now is “expectations”. Years after year consumers and sellers has used to face higher prices before New Year so they form their expectation. We have another reason to have higher prices before New Year in my country. I call it traffic of changes in prices which again form expectations.

Every year when we get close to the end of the year a committee will decide how much to increase the minimum salaries for employees of government and other sections for the next year. Another committee will decide how much to increase the price of fuel which has an important role in transportation cost including public transportation and transportation of goods across the country. Another committee will decide how much to increase the price of natural gas (used by households), electricity and other utilities. I call this mechanism “Shock trapy”. Why? The purpose of this once increases in prices and salaries is to avoid persistence inflation. It is assumed by officials that when you increase all prices once like a shock we will have a sudden inflation and then during the year everything will be OK. Is this true? I don’t know. We are going to try dividing these changes across months of years to avoid expectations to form only for New Year. If we assume rationality of people I think this will not be useful in long term and the ultimate solution is to let invisible hand to work but is invisible hand successful in regulating market even for New Year? (This is like a cycle, we are back to first point)