Grocery price caps not the answer to the UK’s inflation problem

[ad_1]

Prime Minister Rishi Sunak is proposing some form of price cap on food staples like milk and bread to slow their price increases. This is likely to set maximum prices that sellers are not allowed to exceed, although it appears to be voluntary.

Price caps are popular with the public: 71% of UK voters backed them in a 2022 poll. But they are also hated by economists: 75% oppose price caps even in emergencies, according to another poll from 2022. Why is there such a divide? What are the disadvantages of price caps?

The UK government is reportedly considering a plan similar to what France did in the spring, where supermarkets were asked to freeze or voluntarily reduce the prices of certain items to the lowest possible level.

One concern is that voluntary price caps won’t do much. And the danger with introducing price caps below current levels is that some suppliers are likely to exit the market and stop supplying. This is because capped prices no longer cover their costs. Thus, the capping of food prices could lead to the emptying of supermarket shelves.

There are many examples in other countries where price caps have led to shortages:

Zimbabwe ordered price caps on basics such as groceries to combat hyperinflation in 2007. The resulting empty supermarket shelves forced shoppers to line up at 5 a.m. morning to get the bare necessities before supplies run out.

Hungary capped the price of gasoline in 2020. As international oil prices surged after the invasion of Ukraine, suppliers could no longer cover their costs. Imports into Hungary dried up, leading to a shortage of gasoline. Hungary was forced to drop the price cap to restore supply.

After Berlin capped property rents in 2020, the number of apartments on the rental market fell significantly. San Francisco had a similar experience in the early 1990s.

Alternatives

So what else could be done to lower food prices? Representatives of UK supermarkets argue that instead of capping prices, the government should reduce bureaucratic requirements for the industry such as border controls. But can less paperwork really reduce prices?

A study by the London School of Economics estimates that the tightening of Brexit border controls since January 2021 has increased food prices by 6%. This number does not take into account the entire 19% increase in food prices over the past year.

Nevertheless, this part of the price increases is a choice. With or without Brexit, the UK could have avoided this problem by having a more liberal border policy, but it did not. The EU has erected similar trade barriers against the UK, but the UK is hit harder because it depends more on the EU for imports than the other way around. This partly explains why UK inflation is the highest of the G7 countries.

Consumer price inflation in the G7

OECD

EU import border controls are also expected to become even stricter by the end of 2023. If an Italian supplier exports Parma ham to a German supermarket, there are no forms to complete at the border. If the Italian supplier exports that same ham to a UK supermarket, they will have to pay a veterinarian to complete forms stating the meat is safe, have those forms checked at the border, pay inspection fees, etc.

More EU suppliers are then likely to stop deliveries to the UK or raise prices to offset the additional compliance costs. Food prices in the UK would then rise further, which the government could avoid by relaxing its own border controls.

Increased border controls have already caused delays in Calais and Dover. PA/Alamy Images

Of course, the bureaucracy extends beyond border controls and imports. By reducing other regulations such as the increasing financial reporting requirements for UK businesses, the government could help bring prices down at least a little. Every additional lawyer, accountant, or administrator raises food prices without putting more items on supermarket shelves.

What would a doctor do?

An unconscious patient arrives at the emergency room with a high temperature. Ah, said the novice doctor holding the fort, the temperature must be lowered. He orders an ice bath. An hour later, the patient died. By focusing on the symptom, the underlying cause (perhaps an infection?) has not been addressed.

The analogy between temperature and prices is crude but appropriate. Like a good doctor, economists distinguish between symptoms and causes. Border controls are one of the causes of high food prices; others include higher energy costs and too few workers for the food industry.

It would therefore be helpful if the government let in overseas fruit pickers and encouraged inactive UK workers to return to the workplace. It could also speed up planning procedures for wind and solar power generation to bring down electricity prices for greenhouses, although the benefits would take some time to materialize.

Combined with the relaxation of border controls for imports, this would be a more effective response than price caps. Focusing on symptoms alone is not the way to get the patient on the road to recovery.

[ad_2]