European politicians are imposing price ceilings to deal with soaring food costs
European retailers and governments are locked in the worst fight in 50 years over food costs as policymakers resort to price controls to combat the worst cost-of-living crisis in a generation.
Even as falling energy prices have eased overall price pressures, food price growth has continued to soar, prompting increasingly unusual market interventions by politicians in an attempt to quell public anger.
According to Eurostat data, food prices in the EU rose by 16.6 percent in the year to April, well above the general inflation rate of 8.1 percent. The biggest price increase was the price of basic foodstuffs, the price of eggs rose by 22.7 percent, the price of whole milk by 25 percent, and the price of sugar by 54.9 percent.
“In the Western world, we haven’t had general price controls since the 1970s,” said Lars Jonung, a Swedish economist and expert on the controversial caps.
Central and Eastern European states hardest hit by rising prices, such as Hungary and Croatia, have passed price caps on essential items to protect the most vulnerable, who spend most of their income on food.
According to Nora, a 32-year-old mother of three from Budapest, it is “nice” that products such as whole milk have become cheaper due to price regulation. However, he noted that supermarkets began to limit purchases, meaning he had to visit more stores or shop every day to take advantage of the benefits.
Greece has taken an alternative approach to capping prices by limiting retailers’ profit margins on food and other essential products.
In richer economies, France has a looser deal with supermarkets to offer the lowest possible range. Spain is one of the countries that reduced the value added tax on food. Others, such as Italy, are under pressure to limit the price of beloved foods such as pasta.
The pressure on retailers to brace against price hikes has been exacerbated by the sharp drop in agricultural commodity prices over the past year. The UN food price index was 19.7 percent lower in April compared to the same month of the previous year.
“While some price increases may be justified, there is growing suspicion that others are just opportunistic excuses by businesses to inflate prices,” said Monique Goyens, director general of the Bureau Européen des Unions de Consommateurs, which represents 46 consumer organizations around the world. continent, who called on governments to “take decisive action to protect consumers from spiraling prices”.
Belgian consumer watchdog Test Achats is calling for a measure similar to France’s original inflation basket proposal, which was tougher than what Paris was able to implement. The Austrian chamber of commerce body, AK, also called for “price regulation” of foodstuffs.
Retailers, however, say they are not to blame and that far from the price hikes, they have to bear the brunt of limited goods.
Kodály Delikatessen, a small supermarket in Pécs in southern Hungary, grouped products with caps under a sign that warned customers against buying “dictatorship products,” saying that the wholesale price of some items was higher than the limited retail price.
Delikatessen added: “Regulation forces us to sell at a loss!”
Large enterprises operating in Hungary – such as Lidl, Spar and the French retailer Auchan – claimed this.
“If you buy sugar, you pay HUF 500 (€1.35) per kilo and sell it for HUF 300 (€0.85),” said a representative of an international retailer. “It calculates a negative margin for every unit sold, which is completely absurd in a sector like retail, which is characterized by high volumes and low margins.”
While the measures have been successful in covering the cost of essential items, economists believe they are the wrong solution to high food prices.
A World Bank report on Thursday called on European governments to provide more “targeted policy interventions and social safety nets” to support those suffering from the cost of living crisis. However, the multilateral lender emphasized that price controls and subsidies are “suboptimal as they distort price signals for consumers and producers.”
Central Bank Governor György Matolcsy went further at the parliamentary hearing in December. “You can’t win this battle with old tools,” he said. “Price ceilings and all similar ideas have already proven to be ineffective during socialism.”
“One type of milk can be closed, but there are dozens of types in the inflation basket,” said Péter Virovácz, an analyst at ING Bank.
But with shoppers struggling to cope with the soaring cost of their weekly shop, economists fear politicians will continue to resort to price caps, regardless of their effectiveness.
“Price controls do not work as a means of reducing inflation,” Jonung said. “But they’re addictive, and it’s hard to kick the habit.”
Additional reporting by Leila Abboud in Paris