Here’s your starter for ten. When did this report appear on the BBC’s website?
“The government is discussing plans for supermarkets to introduce a cap on the price of basic food items to help tackle the rising cost of living. A voluntary agreement with major retailers could see price reductions on basic food items like bread and milk. Downing Street sources have stressed that there are no plans for a mandatory price cap. Supermarkets are expected to be allowed to select which items they would cap.”
It is difficult to think of a more idiotic, wrong-headed and misguided mechanism for tackling inflation
We learned last night that Rachel Reeves is asking supermarkets to impose a voluntary price cap on around twenty items. Understandably, the proposal has led to a mix of incredulity, anger and no little bemusement. In the wake of surging food inflation, which is expected to get worse, the Chancellor is trying to lessen the impact on the cost of living. But it is difficult to think of a more idiotic, wrong-headed and misguided mechanism for tackling inflation.
Price controls do not work – cannot work – in a market economy, mainly because the price of a good or service is not only the vital summation of the various factors which are involved in demand for or supply of those goods and services; the price is uniquely able to transmit such information across the economy. Price controls destroy that mechanism and usually makes things worse by boosting demand and causing supply shortages.
But we have been here before – a long time after the 1970s, when price controls were baked in to the economy. That BBC report appeared on 28 May 2023, and concerned the last Conservative government’s plan to do more or less exactly what Labour is now proposing. The current Chancellor’s plan may show that we are governed by economic illiterates but, as that BBC report shows, that is a problem that stretches much further back than 4 July 2024 and the election of the current government.
The next sentence in the BBC report contains a (rightly) withering response to the Conservative plan – from the then Labour shadow work and pensions secretary, Jonathan Ashworth. The idea, he said, was “extraordinary…Rishi Sunak is now like a latter-day Edward Heath with price controls”. Three years later, a Labour Chancellor is proposing exactly the same thing.
In November 1972, Heath introduced a three month wage, price, rent and dividends freeze under the Counter-Inflation (Temporary Provisions) Act 1972. That was followed by the Price and Pay Code, which limited increases, overseen by a Price Commission and a Pay Board. The folly and failure of Heath’s price controls did not put off his successors, Harold Wilson and James Callaghan, who set up the Department for Prices and Consumer Protection under Shirley Williams and then Roy Hattersley.
One might think that 1970s inflation of 26.9 per cent and the consequent chaotic changes in investment in an era of price controls might point to a flaw in the idea. But that would imply that our political class are capable of sustained serious thought. It as if all the lessons of that benighted era, and all the sacrifices under Thatcher to tackle inflation, were not merely irrelevant but entirely forgotten.
Not that anyone should be surprised. Reeves has already floated the idea of rent controls – a version of price controls which has, and can only ever have, a similar deleterious impact. It should not require a Nobel Prize in Economics to realise that if you have a housing shortage, the very worst way to tackle it is to reduce the key incentive to make more housing available – indeed to make it more likely that there will be less housing available.
But we have been here before, again under both the previous and the current government, with the capping of energy bills to seek to mitigate the impact of the surge in global gas prices. More widely, the main problem with the energy market is the extent of existing government control. Market is a loose term.
As for supermarkets: there is no more competitive sector in the entire economy, nor another industry more efficient and brilliant at responding to consumers’ demands. Profit margins are as low as 2 per cent, and no higher than 4 per cent. If some items are to have their prices capped, then – unless the government intends to dictate that profits must be reduced – the prices of other goods will surely have to be raised to compensate, or costs reduced elsewhere, meaning reduced quality.
The Chancellor says that she will lift some regulations if the supermarkets do as she asks – such as new net-zero packaging rules and changes to rules around healthy food. Here’s an idea. Perhaps she could do that anyway, give supermarkets the boost they need to grow more, offer more and become more competitive, and we would all benefit. Or she could do even more. As Lance Forman, of the eponymous smoked salmon supplier has put it: “I will put a cap on the price of our smoked salmon if the Government scraps the regulation forcing me to pay tax on employing staff.”
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