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Should price caps on groceries be introduced?

Grocery inflation is running more than three times that of general inflation according to figures released this week.

And while the latest figure of 16.5% has slowed marginally, it is still the "third fastest rate of grocery inflation we've seen since 2008," according to market consultants, Kantar.

Kantar’s report has led to renewed calls from both the Labour Party and People Before Profit for the introduction of price caps on certain household staples to be explored to alleviate pressure associated with the cost of living crisis.

But Irish retail groups have dismissed the calls with Duncan Graham, managing director of Retail Excellence telling the Irish Independent that, "The impact of this would be felt throughout the [food supply] chain. It would be detrimental in the long run and wouldn’t solve the problem."

As part of The Conversation from RTÉ's Upfront with Katie Hannon, we asked two people to join our WhatsApp group to discuss whether a price cap on certain staples should be introduced.

Paul Murphy is a People Before Profit TD for Dublin South-West.

Damian O’Reilly is a senior lecturer in retail management at Technological University Dublin.

Paul Murphy: Hi Damian. My starting point is that families are suffering from a cost of living crisis. The average worker is down about €76 a week in real terms. The result is poverty for many, with 20% of parents saying they go without food to feed their children.

This inflation is primarily 'greedflation’* - with the number one cause of soaring prices being blatant profiteering by corporations internationally and in Ireland. One crucial way of cutting across the profit price spiral is to use the power the government has to introduce price controls on essential goods.

[*Editor’s note: Greedflation refers to the idea of exploiting inflation to create excessive profits.]

Damian O’Reilly: I agree that there is an impact on society, especially the less well-off because of the cost of living crisis.

The idea of price caps is a non-runner and the comments* of the Labour Party TD [Ged Nash] are populist political tosh. Why doesn’t the Government go after the energy companies? Gas and oil prices are decreasing, and these are not being passed on.

[*Editor’s note: Labour Party TD and Finance spokesperson Ged Nash this week floated the idea of price caps being introduced, citing reports from the UK that the Conservative government were considering the measure].

Paul Murphy: Absolutely the government should go after the energy companies. We put forward a Bill to have maximum prices on petrol, diesel, electricity, kerosene, natural gas and oil. We want the entire energy sector to be renationalised. But the energy sector isn't the only sector engaged in profiteering. That is also happening in the big agri-business companies and big retailers.

Damian O’Reilly: There is no evidence to suggest that there is price gouging - as Ged Nash has referenced - in the retail sector. In fact, there has been intense competition in the sector. And prices today are at the same level as 2012. We had almost a decade of deflation. People don't realise this.

Paul, where is the evidence for profiteering in big retailing?

Paul Murphy: Musgraves made profits of €110 million in 2022*. That was an increase of 12% compared to 2021. Tesco made €2.6bn in profit (across UK & Ireland), with a 6.6% increase in revenue in Ireland in the second half of 2022 as prices increased. Is that enough evidence for you?

[*Editor’s note: Musgrave’s profits were reported in an Irish Times article last November].

Damian O’Reilly: The retailers have noticed what price competition has done to their margins over the last 10 years.

Intense competition in the retail sector is driven by more efficient supply chains and the discounters.

Revenue increases are generally because of inflation and Tesco's profits were half of 2021* a result of pressure on margins.

[*Editor’s note: Tesco's annual profit halves as inflation bites].

Paul Murphy: Look at this graph. It shows an explosion in food price inflation from summer 2021. And then look at Musgrave’s profits. Up by a similar amount.

Damian O’Reilly: The Government could have handled this narrative much better. This is a sector with the time lag that the price inflation could have been anticipated.

Paul Murphy: Don't worry, I'm not here to defend the Government. But the main problem with the Government approach is that their only strategy is to ask the retail sector very nicely to reduce their prices. They refuse to even threaten to use the power* they have to introduce price caps on essential goods.

[*Editor’s note: The Consumer Protection Act 2007 allows the Government to set maximum prices for certain products in emergency situations].

These companies operate based on maximising their profits. If they can get away with the huge increase in prices we have seen, they will keep doing it.

Damian O’Reilly: I think you are not following the discussion. We know what's happened with inflation. And it is not possible to make a direct comparison with Musgrave's profits.

Paul Murphy: Do you accept that profits are the driving factor of the inflation we are experiencing or no?

Damian O’Reilly: Absolutely not.

Price caps are in times of war or shortages. How do you regulate the price of a pint of milk?

Tesco's results were essentially solid. Tesco registered a 5.3% increase in sales to £57.7bn. The retailer’s profit before tax halved during the year, but that’s to be expected in a cost of living crisis. In fact, any growth in profits would go down like a lead balloon as households struggle

Paul Murphy: There is a mountain of evidence now to say that the number one factor driving inflation is profits. We know that in the US corporations are recording the highest ever after-tax profit margins.

Three European Central Bank (ECB) economists found that an incredible two thirds of the domestic price increases people are facing are accounted for by corporate profits.

A recent Oxfam report found that 60-80% of price increases in Europe and the US were down to profiteering.

Aidan Regan has a very useful summary of much of this in the Sunday Business Post.

To be clear, I'm not saying retailers' profits are the driving factor in global inflation - the biggest profit-taking sector are the energy companies, but retailers and agri-food are also engaged in it.

Damian O’Reilly: We are talking about price caps and the retail sector.

Paul Murphy: We are yeah.

Damian O’Reilly: And there is no evidence to suggest excessive profits. Aldi's profit margin in the UK last year was 1.7%.

Paul Murphy: Oh, we're at ‘excessive’ profits now are we?

Damian O’Reilly: Good retort.

Paul Murphy: One consumer’s ‘excessive’ profits is clearly a retailer’s ‘appropriate’ profits. If no profiteering in Ireland, then why are Musgrave's profits up?

Damian O’Reilly: As a private company you might have to ask Musgrave's. There is a lack of transparency in the retail sector reporting. This should be addressed.

Paul Murphy: There is something we can definitely agree on!

Damian O’Reilly: In the context of the rising cost of living and the importance of helping customers make more informed decisions at the shelf. Shelf Edge Labelling (SEL)* could better reflect the price per unit in kg or litre or unit.

[*Editor’s note: Shelf Edge Labels (SEL) are labels used in the retail industry to display product, pricing and promotional information].

I am assuming that we also agree that price caps are not the way forward?

Paul Murphy: No! Price caps are one important measure that should be used to cut across the profiteering - in energy, in electricity, but also in essential goods from supermarkets.

Damian O’Reilly: The Competition and Consumer Protection Commission (CCPC) need to look at drivers of grocery price inflation and expectations of future prices (this can be achieved as there is usually a time-lag in production), price setting in the different points in the supply chain, relationship between changes in input prices and changes in consumer prices and effectiveness of the supply chain and competition in various points in the supply chain.

[Editor’s note: Paul Murphy’s next response is to an earlier point made by Damian O’Reilly where he said, "Price caps are in times of war or shortages. How do you regulate the price of a pint of milk?"]

Paul Murphy: To answer this. Very simply - it is easy. The government uses the power available to it under the Consumer Protection Legislation to say the maximum you are legally allowed to charge for a pint of milk is X.

You then do the same across the board to basket of essential goods - bread, pasta, eggs, rice, chicken.

Damian O’Reilly: And how does the govt or CCPC come up with a max price on each item? There are approx. 15,000 items in a supermarket

Paul Murphy: We don't need price controls on 15,000 items though. In Greece, they have agreement from supermarkets to reduce prices on around 50 essential goods.

Damian O’Reilly: Yes. But that's not a price cap.

Paul Murphy: Preferably the CCPC would be replaced by a body with real powers, and which has representatives of consumers and workers on it. They would examine the levels of profit-making on this list of 50 or so essential goods. They would establish the true cost of production. They would then determine the maximum price to be charged. That could be changed over time.

Damian O’Reilly: There is no evidence that the price caps introduced had any effect in Hungary where they were introduced.

[Editor’s note: Hungary to phase out some of its price caps as inflation comes down - PM Orban]

Paul Murphy: If we had price controls that reduced prices on essential goods (where inflation is significantly higher than the average by the way), it would make a real difference to families who are struggling to buy what they need to on a weekly basis.

Damian O’Reilly: The CCPC need to determine the cost drivers at different points in the supply chain. The farmers' prices are known. In my opinion the processors - the multinationals like P&G and Unilever - need to be more transparent. There is no evidence that retailers as a group are price gouging. Sugar prices are up because of India decreasing supplies; bread is up. because of Brexit. Milk up as result of input costs.

Paul Murphy: Again, I agree about the processors. They are having even bigger increases in profits than the retailers. Glanbia had a 53% increase in profits last year. Goodman's Slaney Foods and Irish Country Meats profits were up 27%.

I don't deny there are increased input costs, but there is a lot of evidence to suggest that right through the supply chain, corporations are taking advantage of that to push prices up much further than the increase in input costs would justify.

Damian O’Reilly: That comment is generalised. A "lot" of evidence... Waffle if you don't mind me saying.

Can I assume that we agree that the retailers are not price gouging?

Paul Murphy: It depends on what is meant by price gouging. If it means they are engaged in cartel-like illegal behaviour, I certainly don't have any evidence of that. But I think they're engaged in the usual behaviour of firms under capitalism, maximising their profits. And that is coming at the expense of pushing more families into poverty, and we should stop it.

Damian O’Reilly: I speak with retailers every day and life is tough as an independent retailer. And 75% of retail in Ireland is made up of independents.

Paul Murphy: Have a read of this paper by three ECB economists, "Unit profits increased by 9.4% in the fourth quarter of 2022, year-on-year, and contributed more than half the domestic price pressures in that quarter, while unit labour costs increased by 4.7% and contributed less than half."

Damian O’Reilly: Can the local store in your area afford price caps?

Paul Murphy: My local store is a major multinational, I'm sure they will be just fine. For genuinely small businesses, the state should support them as necessary to ensure that we retain small businesses and ensure that people can afford to buy the food their families need.

Damian O’Reilly: The convenience sector (mainly Spar & Centra, who are predominately franchises) count for 35% of the grocery market in Ireland. They support thousands of jobs in Ireland. Why not support one of these instead of your local multinational? Keep the money in the local economy.

Paul Murphy: You think I should do my grocery shopping in a Centra?

Damian O’Reilly: We shop in our local market for fruit and veg; our local butcher and fishmonger. We try buy as much Irish produced product as possible.

People and consumers need to engage in conscious consumption*. Let's become more aware of what we eat; its origin and sustainability. Eat what's in season.

[*Editor’s note: Conscious consumption refers to shopping in ways you believe makes a positive social, environmental or economic impact].

Paul Murphy: I think we can't ask the individual consumer to take responsibility for all of this. Of course, we should all be more conscious. But there is a massive imbalance of power between the consumer and big retailers. We should use the powers the State has to address that - through price controls on essential goods, through labour regulations, including a higher minimum wage, and through environmental regulations to ensure our food is sustainable.

Damian O’Reilly: If your local multinational happens to be a Tesco then you probably know they are the largest exporter (to the UK mainly) of Irish produce contributing millions to the Irish economy.

Consumers have the ultimate power over where they shop and what they buy.

Paul Murphy: That's where we disagree. The big multinationals have much more power than the average consumer. It's why ultimately, they should be in public ownership and run democratically to serve people's needs, not maximise profits for their owners.

Good to talk to you!

Damian O’Reilly: I agree that the minimum wage needs to be increased.

Public ownership leads to lack of competition and ultimately shortages and the biggest loser in that scenario is the consumer.

Bye. Good to talk.

Read last week's edition of The Conversation, where we asked if the sale of SUVs should be banned, here.

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