Weekly Updates
Weekly Updates
- After recent episodes of profit-led inflation, it is fashionable to ask what governments can do to bring down “unfair” prices (especially food prices). One response might be price caps or price control. However, from Roman Emperor Diocletian to US President Nixon, government control of prices has failed. Controls make it difficult for prices to adjust relative to one another or in response to changing fundamentals, and when controlled prices are lower than uncontrolled costs, producers will tend to stop selling altogether.
- These failures may explain why US Vice President Harris has conspicuously avoided talking of price controls while advocating action to lower food prices. There is a more effective way to tackle profit-led inflation.
- Profit-led inflation is an example of market failure. Sellers have better information than consumers do. (Consumers are persuaded that profit-led price increases are caused by something else.)
- Improving competition, or even just threatening to force an improvement in competition, can address the market failure. Competition inquiries focus attention on profit-led inflation, which can ignite a consumer rebellion against price increase. The threat of losing customer loyalty will often be enough to change retailers’ behavior. If that does not work, price competition may be encouraged by the threat of breaking up companies, dampening profit-led price increases.
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