Are Price Controls the Answer to Soaring Food Costs?

Russian President Vladimir Putin is taking a page out of the old Soviet Union playbook to fight soaring food inflation. According to yesterday’s Financial Times, “Russia is introducing Soviet-style price controls on some basic foods.” But it’s not just Russian consumers who are feeling the pinch from spiraling food costs.

China also instituted food price controls recently after inflation rose 6.5% in August from a year ago, the biggest increase in a decade. The culprit here was an 18% surge in food prices. Meat and poultry prices are up nearly 50% in China from the same time last year. Eggs rose 23.6%, and vegetables are up 22.5%.

Pork prices are going through the roof, and for a country like China that eats pork like American’s do hamburgers, that’s putting a serious dent in consumer budgets.

Less developed countries tend to spend a much larger percentage of their disposable incomes on food, than in mature countries like the U.S.

For instance in China, food accounts for 37% of the average total spending for the typical family. In Russia, it’s more than 40%. And in poorer countries in Africa, food costs can be 60% or more of disposable income.

Meanwhile, in the U.S. and most European countries, food costs only account for 10% or less of the average family’s spending.

So the fact that food prices are soaring on a global basis, is a really big deal to most of the world, even if it’s not as big of an issue in the U.S.

Russia Imposes Food Price Freeze

In Russia, food prices rose steeply in September, with vegetable oil gaining 13.5%, butter up 9.4%, and milk climbing more than 7%. This is pushing overall inflation in Russia beyond its target of 8%, and may top 10% by year’s end, according to the article. Since it’s an election year in Russia, with parliamentary elections scheduled for December, the Kremlin is eager to make any move necessary to keep voters happy.

So the government reached an agreement with Russia’s largest food retailers and producers to freeze prices at October 15 levels on selected items including bread, cheese, milk, eggs and vegetable oil, until the end of the year – conveniently after election day on December 2.

History Suggests, Price Controls Won't Work

But just how much good can price controls do to combat inflation? Unfortunately, the historical precedents aren’t very favorable. More than thirty years ago the Nixon administration tried a “wage and price freeze” to combat soaring inflation in the U.S. The result was an even deeper recession in the mid-1970s, and price controls were soon abandoned.

Price controls in Russia, China and other nations might succeed in holding down headline inflation numbers for a short time, but in the long run it won’t reduce the overall inflation rate. Instead, it will just cause dislocations as retailers are forced to raise other prices and producers reduce output.

The law of unintended consequences usually foil any government-sponsored price controls. For example, Russia said recently it’s considering an increase in export tariffs on wheat from 10% to 30% beginning in November, to keep the domestic economy better supplied with grain this winter.

The result: wheat prices at the CME in Chicago surged 6% in just one week – stoking even more food price inflation.

Comments

[Lily]

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