The Treasury's recent suggestion of voluntary price caps on basic food items has been met with strong opposition from industry leaders. Stuart Machin, chief executive of Marks & Spencer, labelled the proposal as 'completely preposterous,' while City analyst Clive Black at Shore Capital accused the government of 'losing its mind in an orgy of neo-Soviet policy ideas.'
Historical Context and Feasibility
This is not the first time a government has considered such measures. In 2023, under former Prime Minister Rishi Sunak, a similar idea was floated but ultimately abandoned. Treasury ministers have since distanced themselves from the proposal, ruling out any mandatory scheme. The voluntary nature of the plan makes it unlikely to be implemented, as retailers are under no obligation to participate.
Economic Reality of Food Inflation
Food inflation stood at 3% in April, and while it may rise due to increasing energy, transport, and fertiliser costs, the UK is not in a state of emergency. Artificially depressing prices of staples like milk, bread, and eggs could have long-term consequences for supply, as historical evidence suggests.
Stuart Machin noted that M&S does not profit from milk or bread, and margins on eggs and sugar are minimal. This reflects the common retail practice of using loss leaders to attract customers. The idea of price caps, therefore, seems redundant in a market already driven by intense competition.
Competition as the Best Regulator
The government's role should be to ensure competition works effectively. The Competition and Markets Authority's 2024 review found no evidence that weak competition was driving overall grocery inflation. Discounters like Aldi and Lidl act as effective price enforcers, particularly on fresh produce, as evidenced by the widespread 'Aldi price match' campaigns among other supermarkets.
UK food retailing is notably more competitive than in continental Europe. Tesco's operating profit margin in the UK and Ireland was 4.7% last year, typical for a market leader in a competitive field. Other retailers operate on even thinner margins.
Backlash and Broader Issues
The strong backlash from retailers highlights their frustration with government policies they believe contribute to inflation, such as increased employer national insurance contributions, business rates, energy policy costs, and bottle-return schemes. They argue that these factors, rather than supermarket pricing, are driving up costs.
Rather than price caps, a more targeted approach would be to increase welfare payments to protect the most vulnerable during periods of rising basic goods prices. The idea of price-controlled milk and potatoes for all, whether voluntary or mandatory, is outdated and should be discarded.
