European politicians impose price caps to tackle soaring food prices

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European retailers and governments are locked in their fiercest fight over food costs in 50 years, with policymakers resorting to price controls to tackle the worst cost-of-living crisis in a generation.

Although lower energy prices are easing overall price pressures, growth in the food cost continued to soar, prompting increasingly unconventional market interventions by politicians trying to assuage public anger.

According to Eurostat, food prices in the EU rose by 16.6% in the year to April, well above an overall inflation rate of 8.1% . Some of the biggest increases have been in the cost of commodities, with the cost of eggs rising 22.7% over the period, whole milk by 25% and sugar by 54.9%.

“We haven’t had price controls generally in the Western world since the 1970s,” said Lars Jonung, a Swedish economist and expert on controversial caps.

Central and Eastern European states hardest hit by rising prices, such as Hungary and Croatia, have decided to cap the cost of basic necessities to protect the most vulnerable, who tend to spend more part of their income to food.

Nora, a 32-year-old mother of three in Budapest, said it was “good” that price controls had made products such as whole milk cheaper. But she noted that supermarkets had started to limit purchases, which meant she had to visit several stores or go shopping every day to take advantage.

Greece has taken an alternative approach to limiting prices by capping retailer profit margins on food and other basic necessities.

In wealthier economies, France has brokered a looser deal with supermarkets to offer a selection of items at the lowest possible price. Spain is one of many countries to have reduced value added tax on food products. Others, like Italy, are coming under pressure to cap costs of beloved foods like pasta.

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Pressure on retailers to meet price increases has been exacerbated by a sharp decline in the cost of agricultural raw materials over the past year. The UN food price index was 19.7% lower in April compared to the same month last year.

“While some price hikes may be justified, there is growing suspicion that others are just opportunistic corporate excuses to inflate prices,” said Monique Goyens, director general of the European Consumers’ Bureau, which represents 46 consumer organizations around the world. continent, which called on governments to “adopt strong measures to protect consumers against spiraling prices”.

Belgian consumer protection organization Test Achats called for a measure similar to France’s original anti-inflation basket proposal, which was tougher than what Paris was able to implement. Austria’s chamber of labor body AK has also called for “price regulation” of food.

However, retailers say they are not to blame and far from price gouging, they must take the hit on capped products.

Kodály Delikatessen, a small supermarket in Pécs, southern Hungary, grouped the capped products under a sign that warns customers against buying “products of dictatorship”, saying the wholesale price of some items was above the capped retail price.

The Delikatessen added: “Regulations force us to sell at a loss!”

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Major companies operating in Hungary – such as Lidl, Spar and French retailer Auchan – have claimed the same.

“If you buy sugar, you pay 500 forints (€1.35) per kilo and you have to sell it for 300 forints (€0.85),” said a representative of an international retailer. “You’re making a negative margin for every unit sold, which is complete nonsense in an industry like retail that’s characterized by high volumes and low margins.”

Although the measures have been successful in containing the cost of basic necessities, economists believe they are a poor 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 pointed out that price controls and subsidies were “sub-optimal because they distort price signals for consumers and producers”.

Hungarian central bank governor György Matolcsy went further in a parliamentary hearing in December. “You can’t win this battle with old tools,” he said. “Price caps and all similar ideas have already proven ineffective during socialism.”

“You can cap one type of milk, but the inflation basket contains dozens of types,” said Péter Virovácz, an analyst at ING Bank.

But the difficulties faced by shoppers affected by their weekly store’s price spike means economists fear politicians will continue to resort to price caps, no matter how effective they are.

“As an instrument for reducing inflation, price controls don’t work,” Jonung said. “But they are addictive and it’s hard to kick the habit.”

Additional reporting by Leila Abboud in Paris