Inflation's Got the U.K. in a Pickle: Can Price Controls Save the Day?

Amidst soaring grocery prices fueled by widespread inflation, the UK finds itself contemplating a daring move: voluntary price controls on vital food items.

Jun 05, 2023

Inflation continues to cause a stir in the U.K., particularly when it comes to essential food items. Recent data from the Office of National Statistics has revealed that food prices are still skyrocketing, leaving policymakers at a crossroads. While the overall inflation rate in the UK has shown some signs of falling, it's still stubbornly high at 7.8%. Prime Minister Rishi Sunak is now considering a desperate approach: voluntary price controls on vital food products like bread and milk. The goal? To strike a delicate balance between affordability for consumers and avoiding any perceived threats to the principles of capitalism.

Since April 2022, food prices in the UK have soared by an alarming 19%, marking the highest single-year increase since 1977. Surging food prices have triggered concerns about the ability of individuals to afford basic food necessities. The Prime Minister's aides have engaged in discussions with supermarkets about introducing standardized prices for essential items, much like a similar policy implemented in France earlier this year.

But what exactly are price controls, and how do they work? Price controls are government-imposed measures that set limits on the prices of goods and services. Typically, they come in two forms: price ceilings and price floors. Price ceilings establish a maximum price, while price floors set a minimum price. Since consumers would like to see lower prices on basic food items, the Prime Minster is suggesting a price ceiling. Economists and historians aren’t too excited.

Supporters of price controls argue that they can protect consumers from skyrocketing prices and ensure that essential goods remain affordable for all. By capping the price of crucial food items, price ceilings aim to address income inequality and promote social welfare issues. However, critics sound a note of caution, pointing out the potential unintended consequences of such policies.

To better understand the complexities of price controls, we can turn to some historical examples. In the 1970s, the UK and the US both experimented with mandatory price controls under conservative governments, but these attempts were widely considered failures. During World War II, price controls and rationing policies were implemented to control inflation and attempt to ensure equitable access to goods. While these policies managed to slow down inflation, they also had other unintended effects on product quality and availability.

History can provide a lens through which to observe the unintended consequences that often come from price ceilings. With prices forced below a market-driven price, suppliers may face reduced incentives to produce or deliver goods, resulting in shortages. These shortages were what necessitated the government to impose a rationing system during the 1940s. This imbalance between the quantity supplied and the quantity demanded can also give rise to black markets or hoarding, exacerbating the initial problem.

The UK is not alone in considering price controls. Countries like France and Hungary have also taken steps to limit the impact of inflation on grocery items. France recently reached an agreement with major grocery chains to cap food prices, while Hungary imposed compulsory price reductions on 20 basic items. However, these measures have faced criticism from business groups, who argue for reduced bureaucratic obstacles instead.

Interestingly, while price controls have been discussed as a potential solution for inflation in the United States, they haven't gained significant traction. Perhaps the memories of Nixon’s 1970s price caps are more salient compared to the British experience. A survey of prominent U.S. economists last year revealed that the majority don't believe such policies would have effectively addressed inflation anyway.

Price controls are not a one-size-fits-all solution. Policymakers must approach them with caution, considering the underlying causes of inflation, such as rising input costs or supply chain disruptions. Ultimately, inflation is caused by too much money chasing too few goods. While price controls may provide temporary relief by curbing price increases today, they can also come with a host of other issues once removed. In case you’re curious about those economists who agreed price controls would reduce inflation, keep in mind that many of them had caveats along the following lines:

Price controls can of course control prices -- but they're a terrible idea!
(David Autor)

Effective price controls, by definition, would reduce price increases, but they would most probably create other huge distortions.
(Daron Acemoglu)

The UK's current deliberation over voluntary price controls highlights the ongoing debates surrounding this economic tool. Despite historical evidence of negative outcomes, price controls often come across as viable solutions. The initial impact may be a reduction in prices, but the long-term outcomes may not be worth the short-term gains. Advocates argue that immediate fixes are necessary, while critics emphasize the potential long-term consequences.

It's a complex issue with varying perspectives. The decision to implement price controls requires careful consideration of the trade-offs and unintended consequences. While UK’s recommendation is only voluntary for now, time will tell if the French and Hungarian policies will be effective in addressing inflationary pressures and ensuring affordability for consumers or if they will join the 1970s version of U.S. and U.K. in failing with price ceilings.

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