Price controls imbalance economies and ultimately do more damage than the inflation they seek to prevent. Cato Institute’s Ryan Bourne explains here why Hungary’s price controls will not work.
Well, we know what Friedman would have said: these price controls will not work as you intend. Limited to a small range of goods, they won’t dampen even measured inflation rates. They cannot suppress actual inflationary pressure, which is determined by the intersection of total spending and output. Even if almost all prices were controlled, as in the U.S. during World War II, a lower measured inflation would ill‐reflect the reduced quality and product re‐formulations that sellers would reach for to circumvent price controls. When controls are removed, the official price level would surge again anyway.
No, the primary impact of crude price caps, Friedman would say, will be shortages of controlled products. At artificially low prices, the quantity demanded would expand, exceeding the now smaller quantity producers are willing to supply, forcing rationing and queuing, while encouraging black markets. There’d be no reason to expect that poor households would benefit from this scramble.
Well, what do you know? Headline inflation in Hungary is currently the highest in the European Union, running at a massive 24.5 percent, with food and power prices up 49 percent and 56 percent through December 2022. Fiddling with the relative price of goods has, predictably, done nothing to curb the inflationary forces of the Ukraine war supply‐shocks and excessive domestic stimulus. In fact, it has made the Hungarian Central Bank’s job of curbing inflation more difficult, with mortgage, fuel, and food price freezes distorting the consumer price index that it targets.
What has happened is that 56 percent of Hungarians report experiencing regular shortages of price‐controlled food products. Supermarkets are rationing sales of covered goods, to which eggs and potatoes were added in November. There have been shortages of granulated sugar, chicken breasts, and pork legs, and retailers are struggling to meet regulations for minimum stock. The central bank’s Governor Gyorgy Matolcsy has explained that price caps are offset by other non‐controlled prices rising, as consumers shift to products they can find and producers seek higher margins elsewhere.
Here Thomas Sowell explains price controls here as only he can:
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