Will a food price cap work? Why Rishi Sunak’s supermarket inflation plans may not be a quick fix

The Rishi Sunak administration appears to be sounding out what would be the biggest intervention on food pricing in supermarkets for decades after last week’s troubling inflation figures.

Over the weekend, the Sunday Telegraph quoted a Treasury source as saying that the government was at the “drawing board stage” for plans to get retailers to sign up to a voluntary price cap on staple foods, like milk and bread. The scheme, which aims to reduce food inflation, would be similar to one currently in place in France.

Food retailers reacted furiously to the news and compared the plans to the pricing controls implemented by Conservative Prime Minister Edward Heath during his ill-fated early-1970s government. Supermarket trade body the British Retail Consortium (BRC) blamed current high prices on “the muddle of new regulation” and insisted the government’s move would “not make a jot of difference to prices”.

It comes after inflation failed to fall by as much as economists had hoped on Wednesday (24 May). The headline rate of price rises, which is measured through the Consumer Prices Index (CPI), fell from 10.1% to 8.7% in April 2023. Worse still, food price hikes remained close to a 45-year high, soaring 19.3% across all types of food retailers, according to the latest Office for National Statistics (ONS) data.

So, why are supermarkets being targeted - and could a food price cap reduce inflation?

Why are supermarkets being targeted?

Given they are arguably the ultimate controllers of the UK food supply chain, supermarkets have a great deal of power in setting the prices we pay for our food.

While some retailers have traditionally been more focused on quality over price (e.g. M&S and Waitrose), most attempt to attract customers with promises of low prices or value for money. It is this competition that has meant UK consumers have been paying some of the lowest prices for their food in Europe for much of the last 20 years.

In recent weeks, the power the country’s biggest retailers have over how much we pay for food has been called into question. During the food shortages we saw earlier in 2023, they were accused of prioritising their bottom lines over food availability. Supermarkets insisted the issues were largely weather-related.

More recently, the country’s biggest stores have been accused of ‘greedflation’ - i.e. keeping prices artificially high in a bid to line their pockets. They have denied this, and the Competition and Markets Authority (CMA) has said it has not seen any evidence of a lack of competition to keep prices low “at this stage”. It is still investigating this issue, as well as whether stores are sticking to laws governing how they display unit prices - a key way for customers to work out value for money.

Would a supermarket food price cap reduce inflation?

According to the Sunday Telegraph’s report, the government thinks that its plan to encourage supermarkets to cap prices on food staples is a way to tackle the “resilient” inflation that has proven to be more “difficult to get rid of than we anticipated”.

Speaking on BBC’s Sunday With Laura Kuenssberg programme on 28 May, Health Secretary Steve Barclay said the government is “working constructively with supermarkets” on the voluntary scheme, which would allow them to choose which products to cap prices on. While it is being officially described as an opt-in scheme, be in no doubt about the political pressure supermarkets are being put under to act.

The supermarkets themselves - through their trade body the BRC - insist such plans will not reduce food inflation. Andrew Opie, director of food and sustainability at the organisation, said in a statement: “As commodity prices drop, many of the costs keeping inflation high are now arising from the muddle of new regulation coming from government. Rather than recreating 1970s-style price controls, the government should focus on cutting red tape so that resources can be directed to keeping prices as low as possible.”

Mr Opie added that despite cost pressures, supermarkets are continuing to pour investment into lower prices, widening their value-tier ranges, “locking” the prices of essentials and raising staff pay. In May, both Tesco and Sainsbury’s announced they were investing in cutting prices on key items. However NationalWorld analysis has also found there have been huge above-inflation increases on value range items over the past 12 months.

In the middle of this war of words between the BRC and the government, we only have one comparable real-world example of a price cap on supermarket food items. In France, the government of Élisabeth Borne has designated the three months between April and June as the country’s ‘anti-inflation quarter’ for food prices.

The main pillar of this plan is a voluntary scheme that has seen most retailers pour “several hundreds of millions of euros” into cutting prices on staple items of their choice. Stores taking part in the scheme have to label participating products with a government logo, while government inspectors are carrying out spot checks to ensure the system isn’t being abused (e.g. if supermarkets are displaying the logo but haven’t actually lowered prices).

Whilst its headline inflation rate has consistently been one of the lowest amongst Europe’s major economies, currently sitting well below the UK inflation rate (8.7%) at 5.9% as of April 2023, food inflation in the country has been very high.

In April - the first month of the price cap - the rate sat at 15%. This marked a 0.9 percentage point fall on where it was in March (although it means prices are still rising rapidly). But figures from France’s official statistics body Insee suggest this drop did not come about as a result of the price cap.

In its calculations for inflation in large, metropolitan, supermarkets (i.e. where most people buy their food), the rate of price rises for staples actually climbed 0.1 percentage points month-on-month to 15.1% in April. Within this statistic, the cost of food and drink (excluding fresh food) increased 1.5% between March and April, with inflation accelerating from 15.6% to 15.8%.

While the policy is only a month old, the figures are unlikely to have made happy reading for the French government, nor for the consumers who would have been hoping to see a let up in the cost of living pressures they face. It also suggests a food price cap policy may not be the quick fix the UK government hopes it will be.