Food inflation and Price Caps

Someone, in a letter to the Today newspaper published on Monday, suggested that the government implement measures to cap price increases in essential food items to fight what he perceives to be profiteering. The example of Malaysia was used by the author to justify the feasibility of price controls.

That the idea is unsound is very obvious when one considers the following points:

• Malaysia has significant domestic food production capabilities, and doesn't have to be a price-taker on the international food market.
• It has an elaborate government bureaucracy designed to subsidise various parts of the food production value-chain so as to keep prices low.
• Capping food prices in Singapore's context will mean a fall in supply if the caps make selling some items unprofitable for importers.
• Price caps benefit both the rich and poor, so that if subsidies were involved, it would be an inefficient use of taxpayers' money.

I think the government's approach of targeted help for the lower income group is a better method as it does not create as much distortions in the food market and help is only given to people who need it. For the rest of us in the middle class, we can adjust to higher food prices by cutting back on other discretionary spending.

That said, the government can help to some extent by using its influence on NTUC Fairprice to have the latter introduce more price competition in the food market, so as to minimise the risk of profiteering. Using competition to fight profiteering is far better than using legal sanctions, as anyone who understands elementary economics will know.