Capping food prices risks backfiring
28 May 2023
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Healthcare
Energy and Environment
Lifestyle Economics
15 November 2024
Commenting on reports that the government may attempt to cap the price of basic food items, IEA Economics Fellow Julian Jessop said:
“Caps on food prices are at best a pointless gimmick and, at worst, harmful to the very people they are supposed to help.
“Despite hype about ‘greedflation’ driving up food costs, UK supermarkets work on tiny profit margins. While they might be willing to regard some basic foods as ‘loss leaders’ for positive publicity, they may also compensate for price controls by reducing quantity or quality, and by raising prices for ‘uncapped’ goods.
“It is not even certain that the prices of capped goods would end up lower than if there were no cap. Supermarkets may simply price to the cap, and not cut prices further even if falling costs allowed it. Strong competition should prevent this, but it would incentivise supermarkets to cut their prices anyway, making price controls pointless.
“The government will hope that this is enough to show that it is ‘doing something’ about food inflation. But it could just encourage calls for more intervention, including making the caps legally mandated as with the energy price cap, and extending to other sectors like housing in the form of rent controls.”
ENDS
Notes to Editors
CONTACT: media@iea.org.uk / 07763 365520
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
“Caps on food prices are at best a pointless gimmick and, at worst, harmful to the very people they are supposed to help.
“Despite hype about ‘greedflation’ driving up food costs, UK supermarkets work on tiny profit margins. While they might be willing to regard some basic foods as ‘loss leaders’ for positive publicity, they may also compensate for price controls by reducing quantity or quality, and by raising prices for ‘uncapped’ goods.
“It is not even certain that the prices of capped goods would end up lower than if there were no cap. Supermarkets may simply price to the cap, and not cut prices further even if falling costs allowed it. Strong competition should prevent this, but it would incentivise supermarkets to cut their prices anyway, making price controls pointless.
“The government will hope that this is enough to show that it is ‘doing something’ about food inflation. But it could just encourage calls for more intervention, including making the caps legally mandated as with the energy price cap, and extending to other sectors like housing in the form of rent controls.”
ENDS
Notes to Editors
CONTACT: media@iea.org.uk / 07763 365520
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
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