Wednesday, June 13, 2012

Why do prices not come down?

Something is not playing out according to the rule book. The purchasing power of Greeks has now shrunk for about 2 years and as far as recipients of salaries & pensions are concerned, their purchasing power has declined massively. One would think that with such a huge decline in demand, prices would go down, too; right?

Wrong! To the extent that I can judge prices in stores, supermarkets, restaurants, tavernas, fast-food places, etc. - I don't recognize a deline relative to two years ago. In fact, sometimes I wonder whether prices haven't even gone up.

Maybe I am reading the wrong papers but I have not read a single article todate which would explain why this is so.

PS: somebody must be making a killing! If a business could reduce its wages & salaries as much as happened in Greece but could maintain its sales prices and business volume, its profit must be increasing quite impressively.


  1. That is an interesting point.
    There seems to be at least some effect in the direction that you expect, insofar as the Greek inflation rate is now lower than in other European countries. It used to be higher than the euro area average. (cf,for example ECB statistics:(
    Still, statistically, there does not seem to be a negative inflation rate. That might have to do with a general "stickiness" of prices, a phenomenon experienced also in other cases. There might also be a statistical problem, as sellout prices will not be represented in current price statistics. But it could be interesting to investigate the matter further.

  2. Mr. Kastner,

    The "greek paradox", where the deflation fails, has several reasons:

    1) The greek "free market" economy in the sector of goods is in reality a closed cartel. Greece imports too many goods and the companies that import them are only a few, forming an unofficial monopoly. They fix the prices between them.

    2) The profession of truck driver is open only on paper. In reality it's a closed profession and thus, costs of transportation in Greece is much higher compared to other countries.

    3) Greece imports much of her goods from western and central europe. Add that to point 2.

    4) The cost of gasoline due to the new taxation has skyrocketed.

    5) The increase on VAT and the "emergency one off tax" on profitable companies, has made businesses hesitant to lower prices.

    6) Foreign supermarket chains (like Lidl or Carrefour), see no reason to lower the prices, since the market keeps higher prices for the previously mentioned reasons.

    The result is, that many people are literally starving.


    1. I can understand that cartels work to keep prices up. What I can't understand so well is that with the dramatic decline in purchasing power over the last 2 years, how shops & restaurants can still be full with people paying those prices. I understand that in a city like Thessaloniki, 90% may be starving but as long as 10% are doing well and spend a lot of money, they system will go on (extreme example). I also understand that there is a lot of cash in the Greek economy which does not show up on official books. Nevertheless, I continue to be surprised seeing high prices AND seeing consumers paying them.

    2. Consider that the in the "golden years", tax evaders made up much money. A relative of mine, used to say, that they have money to live two lives. These, continue to spend, because they 've "stockpiled" money. Although, even those are spending much less compared to the future and have emptied their greek bank accounts in favour or swiss, british bank accounts or real estate (specially in Britain).

      It's a combination of tax evasion and black economy (which is about 20% of GDP), with the latter increasing rapidly after 1990 due to cheap work force from illegal immigration, that keeps such businesses afloat.

      To give you an example, the real estate business in Greece is frozen. But the constructors, aren't dropping the prices for new housing fast enough and as much as one would expect. Because they are notoriously one of the professions that benefitted the most from the cheap mortgages the banks were giving and "black" workforce of illegal immigrants. So they sit on the money they made in the past 20 years and drop prices very slowly.

      Also, specifically about food, there is also a cultural thing. The Greek will cut his souvlaki for last.

      If you go to a city in Greece and ask around, you will see that the shops that are fast-food like are the ones who shut down the least. Although they do too.

    3. Sometimes I get the feeling that a Greek shop owner will rather close his business than lower his prices...

    4. That's also true in a part of show owners. I have seen this too. There are 2 mentalities. One that says "Profit comes through high consumption".

      Then there are those who believe "Few customers but good ones". Meaning, customers that don't mind paying high price.

      Now, the second way of thinking may have worked for many in the past. It doesn't work so easily now with the crisis. And their business fail because they can't adopt their mentality to the new reality.

      On the contrary, shops that give offers or lower their price, usually survive better.

      But, mentality is something not easy to change...


  3. Oh, a note on fast foods/restaurants. Consider that they had 9% VAT and now they are at 23%. (New Democracy claims it will bring it back to 9%, but it's something that we have to see first).

    This is a huge increase and of course, it will hurt tourism too.