A cost of living crisis. Pressure on the government to step in to help hard-pressed consumers. Calls for supermarkets to cut prices on staple food items. Substitute Rishi Sunak for Ted Heath, step into a time capsule and journey back to Britain in 1972.
Let’s be clear: ministers are not considering imposing the sort of statutory price controls on a loaf of bread, a pint of milk or a bar of soap that were put in place half a century ago. Not now and not ever, according to Whitehall sources. But it has emerged that Sunak and his team are certainly not averse to the big supermarkets coming up with their own voluntary agreement to reduce the cost of the weekly shop.
This, in itself, is an indication of just how concerned ministers are about the stickiness of inflation – and food price rises in particular. Official figures out last week showed the cost of living as measured by the consumer prices index fell last month by much less than expected, with the cost of food almost 20% higher than a year earlier.
The backdrop to reports this weekend about voluntary price curbs is the fact the prime minister made five new year pledges to voters in early January, one of which was to halve the annual inflation rate by the end of the year. At the time, it looked like the easiest of goals, but almost halfway through the year it now looks more of a stretch. Hence, the “brainstorming session” between government special advisers and the big retailers to come up with something – anything – that might help hasten the process.
France appears to have been the inspiration for the idea of industry-led price curbs. On the other side of the Channel, Emmanuel Macron’s government struck a deal in March under which food retailers agreed to set the “lowest possible price” on a number of everyday items for three months.
The drawbacks of price controls are obvious. The proposed voluntary structure means supermarkets can choose whether to take part (and not all of them have). There is nothing to stop food retailers from raising the prices on “non-staple” items in order to protect their takings and their profit margins. Controls distort the price mechanism, typically boosting demand and causing supply shortages. They are also poorly targeted, benefiting rich households as much as poor ones. Increasing welfare payments to the most vulnerable is a more cost-effective way of offering financial support.
All that said, many of those objections also applied to the capping of energy bills after the surge in global gas prices last year, and that didn’t stop governments – including the UK’s – from stepping in to prevent a catastrophic hit to living standards. Price controls were considered the least-bad option in that case. What’s more, they can be effective as a short-term policy tool. Provided the reason for the price surge is temporary, price controls can give governments a breathing space. Hence the three-month nature of the scheme in France.
Back in the 1960s and 1970s, supporters of price controls said they were needed to prevent a small number of firms exploiting their market power to gouge consumers. Although the term had not then been coined, it was an early sighting of greedflation, which is where companies boost profits by raising prices by more than their costs have increased.
Although Britain’s food retailing is dominated by a handful of supermarket chains, the big grocers insist their modest profit margins show they do not operate as a price-fixing cartel. On the contrary, they say stiff competition means consumers are getting a good deal in exceptionally difficult circumstances.
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The price of food on the world’s commodity markets was 20% lower in April than a year earlier, but it is taking time for consumers to feel the benefit. According to the British Retail Consortium’s latest bulletin, annual food price inflation eased in May, but only from 15.7% to 15.4%.
So what is the government up to? By seeming to lean on food retailers, ministers can look tough while not actually doing anything. Then, if as expected, food price inflation starts to fall, they can claim the credit. If, on the other hand, food price inflation remains stubbornly high, they can blame the supermarkets.
