Food price caps are a wrongheaded policy

Last week’s shock inflation figures have so rattled the Government that it is reaching for mechanisms more commonly associated with socialist planning than free markets.

The Sunday Telegraphreported how ministers are in talks with food retailers about placing a cap on basic items to help ease the cost of living. 

We need to go back to the 1970s for the last time there were price controls, introduced by both the Conservative and Labour governments. There was even a Department of Prices and Consumer Protection between 1974 and 1979, before being abolished by Margaret Thatcher’s administration.

It is extraordinary that anything similar could be considered today, despite the protestations of ministers that the cap being sought is voluntary. The 1970s saw rampant inflation, peaking at 23 per cent in 1975, and it is to that baneful decade that we need to look for parallels with what is happening today.

The latest ONS inflation figures showed food prices rose by 19.1 per cent in April. Yet price (and income) controls in the 1970s did not bring down inflation, but instead exacerbated it, triggering mass strikes for higher pay.
Ministers say they want a voluntary agreement with retailers, covering items such as bread and milk, though dairy farmers who struggle to make any profit from selling to the supermarkets will doubtless find that alarming.

The big retail chains deny they are profiteering by keeping prices higher than is necessary now the worst impact of the Ukraine war has worked through the system. Given the competition from low-cost entrants such as Lidl and Aldi, it is hard to see them getting away with it. Moreover, during the pandemic, the retailers kept the country going; it would have been a different story had the sector been run by the state. 

There is, however, an issue here: why aren’t bills shrinking? The UK is not alone, with food prices rocketing elsewhere in Europe and governments there also considering price controls. Ministers are said to be looking at the French approach, by negotiating a looser agreement to offer a selection of items at the lowest possible price.

Until recently, the grocery market has worked well in keeping prices down, and the Competition and Markets Authority is to look into allegations of profiteering. That should be the limit of regulatory intervention. Price caps, voluntary or otherwise, are a panicky and wrongheaded response.