German economist Isabella Weber is an assistant professor of economics at the University of Massachusetts Amherst.Fred Lum/The Globe and Mail
Angella MacEwen is the senior economist at CUPE National in Ottawa.
May inflation numbers showed that the cost of food isn’t growing as fast as it was, but even small increases in food prices build on two years of staggering increases. Groceries cost 21 per cent more than they did in May, 2021. Meanwhile, households’ disposable income is just 5 per cent higher, while Canada’s food and beverage retailers added almost 18 per cent to their bottom line.
Nothing in our standard tool box of policies will provide the immediate relief that people need.
One alternative that could is price controls, which arguably aren’t popular. When NDP Leader Jagmeet Singh spoke to the party’s motion on food price caps recently, he was met with a skeptical question asking if this type of policy was appropriate for our free-market economy.
In 2021, the German economics professor Isabella Weber, who teaches at the University of Massachusetts Amherst, got exactly the same response when she set off a firestorm by asking, “Could strategic price controls help fight inflation?”
Time, however, has proved Prof. Weber right. Governments around the world have accepted that strategic price controls can be an effective tool.
For example, the South Korean government launched a task force that will monitor and manage the supply of many essentials in order to stabilize prices. Last year, France established an agreement with food retailers to lower prices on 5,000 food items, and backed it up with the threat of financial consequences if food prices and profit margins didn’t come down.
As Prof. Weber said in a recent episode of The Globe and Mail podcast Lately, she didn’t think she was being controversial when she pointed to the use of price controls to temper inflation after the Second World War. The parallels between that era and pandemic-induced economic disruption were clear, with both experiencing supply bottlenecks and strong demand.
And, she said, the most important economists of the 20th century agreed that this situation would “trigger inflation, create windfall profits, and ultimately erase the purchasing power of ordinary people, resulting in political and economic harm.” Those economists agreed that the solution was temporary and targeted price controls.
Prof. Weber said her point was that “we did not have to respond with interest-rate hikes, we did not have to push down the whole economy.” We had historical precedence for targeted interventions that would be more effective given the structural causes of the inflation we were experiencing.
Some high-profile economists were initially hostile to Prof. Weber’s position, but the primary academic debate centred around whether or not we were experiencing the type of economic shocks that would cause “seller’s inflation.” Seller’s inflation describes the situation where corporations are not afraid that increasing prices will cause them to lose market share, allowing them to set prices higher than standard economic theories would predict. Interest-rate hikes and competition policy are largely ineffective against these types of price increases.
Prof. Weber’s team responded by documenting corporate earnings calls and public statements by chief executives. She says there was a common story that emerged – leaders reasoned that “my costs are exploding, but I know that the costs of my competitor are also exploding, so I’m going to respond to this by increasing my prices and protecting my profit margins.”
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The empirical data show that’s exactly what happened. Prof. Weber proved that profits are an important part of the inflation story. She also found that when this dynamic happens in essential sectors – such as housing, energy and food – it creates a ripple effect throughout the economy.
We’ve seen this type of inflation happening in Canada. In October, the Competition Bureau issued a report on corporate concentration in Canada. The authors noted that the ability to pass along higher costs and maintain profit margins is evidence of pricing power. Not only did Canada’s major grocery chains maintain their profit margins, they increased them. And excess corporate pricing power isn’t necessarily behind us – a recent report from Canadians for Tax Fairness finds that corporate profits in 2023 were still double the levels of the decade before the pandemic.
While we might not talk about them very much, price controls already exist in our economy, and they can take many different forms. Governments across Canada have caps on rent increases, energy fees, long-term care co-payments, child-care fees and more. In fact, when the Bank of Canada sets the interest rate, it is controlling the price of money.
It is important for us to start having evidence-based conversations about the role of price controls in ensuring workers and their families can afford a decent life. Prof. Weber’s research has shown that price controls are an important tool in the policy tool box. We should listen to her.