Capping food prices risks backfiring

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.”