Growing number of countries introduce price caps
Governments primarily tend top freeze the price of natural gas, district heating and electricity. Many companies are cutting the price of food and other products voluntarily.
Countries that have adopted price caps
A few days ago, the German government announced that it was taking steps to alleviate the cost-of-living crisis. Up to 80 per cent of last year’s consumption, the price of natural gas, district heating and electricity will be capped for households at 12 cents, 9,5 cents, and 40 cents, respectively, per kilowatt hour. Germany will introduce a discount monthly public transport ticket costing 49 euros. The measures will be introduced gradually in the coming months and are to be withdrawn in the spring of 2024. Moreover, the federal government will pay this December’s monthly gas bill for all households, the Hungarian economic paper Vilaggazdasag reports.
Croatia has capped electricity prices from 1 October to 1 March to help companies and households that are grappling with rising inflation and the energy crisis. The upper limit for the price of electricity for households is set at 59 and 88 euros/mWh, depending on their consumption in the previous six months.
The Romanian government has extended until 1 August 2023 the price cap decree in force since April, which applies to a monthly electricity consumption of 255 kilowatt hours. This is the upper limit to come under the price cap of 0.80 leu (16 cents) per kilowatt hour introduced to protect households from market prices. Households exceeding the consumption threshold defined in the price cap decree must pay the market price for the electricity they use.
At the beginning of October, Bucharest also decided to limit the price of firewood and other types of wood used for heating. The price of firewood, wood chips, wood shavings and sawdust has been frozen at 400 lei (81 euros) per cubic metre until next April, while a price cap of 1500 leis (305 euros) per tonne applies to wood bricks and a cap of 2000 leis (407 euros) per tonne to pellets (compressed wood fibre), with VAT included. However, some sources suggest that these measures may be withdrawn.
Világgazdaság points out that sometimes it is not governments, but companies that step in: the French retail chain Carrefour announced in August that it would freeze the prices of a hundred essential everyday items until November 30, from canned sardines through to rice and washing-up liquid. In May, the French supermarket group Leclerc announced that it would introduce a price cap on 120 of the most frequently purchased products.
Morrisons, the UK’s fourth largest supermarket chain founded in 1899, made a similar move when it put a freeze on the price of 150 essential products, including chicken breast, potatoes, bread, tinned beans with tomatoes, several vegetables and fruits.
Tesco announced last month that it would put a price cap on more than a thousand staple food products in the UK, and in April Asda, Britain’s third largest supermarket, said it would sell more than 100 products at a lower price until the end of the year.
After freezing household utility bills, interest rates and the price of fuel and staple foodstuffs, the Hungarian government may soon impose price caps on additional products. Inflation is sky-high, but just how steep the price hikes would be without price caps is unclear.
What are the pros and cons of price caps in Hungary?
In mid-November 2021, the Hungarian cabinet fixed the retail price of petrol and diesel at 480 Hungarian forints per liter (appr. 1.2 euros). At the time of taking the measure, 95-octane petrol would cost 506 forints (1.25 euros) per litre while non-premium diesel 512 forints (1.27 euros) at the pump. These prices were replaced by the official maximum price level of 480 forints.
In the case of petrol, the shadow price only fell below the fixed price level for a short period (for one week from 8 December 2021), and no such drop has since occurred in the price of diesel. The move was originally introduced for three months, but its was last extended in mid-February until the end of the year. In the meantime, the rules of the fuel price cap have been tightened several times, but the essence has not changed:
on an average 50-litre refueling, Hungarian motorists save 10-15 thousand forints (35-40 euros) compared to the current world market price.
Until February, vehicle owners saved around 22.4 billion forints in gas money, according to estimates, and they saved an additional HUF 44 billion by mid-May. Since then, their savings may have easily exceeded 100 billion forints (€249 million) .
The fuel price cap was also a reflection of the government’s determined economic policy approach. When announcing the decision, the government indicated that they believe that fixing the upper limit of the price will help the economy and can also contribute to reducing inflation. This was confirmed by the numbers: the proportion of fuel consumption in the consumer basket is 6 per cent, so as a result of a 7-10 per cent price increase, inflation would be 0.4-0.5 percentage points higher than its current level, Vilaggazdasag writes. The paper’s analysis also points out that the most important macroeconomic effect was that the demand for fuels did not wane. In fact, to the contrary, so consumers did not perceive a decrease in their disposable income and could spend more on other things than they would have done in the event of higher fuel prices.
The jump in fuel prices did not affect the cost of food and other products for which transportation is key, so this has moderated the spillover effects of inflation to some extent.
The decree on the temporary fixing of interest rates on retail loans was published in Hungary on 24 December, 2021. The essence of the measure is that the interest rate on these loans cannot be determined on based on prevailing market conditions at the time of interest turnover, but rather in accordance with the situation on 27 October 2021.
The measure is already protecting approximately 350,000 debtors from a significant, up to ten-per-cent increase in the cost of their loans.
The Hungarian government most recently extended the provision introduced in January, 2022 until 30 June 2023, and also expanded its scope. In light of this modification, 80 billion forints in 2022 and more than 60 billion forints in the first half of 2023 will have remained with those affected. Thanks to the interest rate cap, an average family will save HUF 282,000 (nearly 700 euros) this year, and this amount can increase by HUF 174,000 (approx. 430 euros) in the first half of 2023.
Next year, without the interest rate cap, average loan repayments would increase by 55 per cent.
Officially capped prices for six basic foods came into effect in February. Pursuant to this, the prices of granulated sugar, fine wheat flour, sunflower cooking oil, pork leg, chicken breast, chicken back and cow’s milk with 2.8% fat content were maximised at their 15 October levels. The measure may reduce inflation by a few tenths of a percentage point, or at most half a percentage point, but according to other assessments, this may be 1-2 percentage points.
All this also has a social impact, as the measure certainly provides more help to families and individuals who belong in the lower income brackets, because these goods are present in a higher proportion in their shopping baskets.
The price caps on gas and electricity bills withstood the energy crisis raging in Europe, but a two-tier system was established in August. The government maintains the price cap only up to average household consumption, above which it introduced a so-called residential market price.
Households’ reduced energy bills go a long way to enable the expansion of consumption and to assure that changes in real wages remain in the positive range.
With the change in pricing from the end of the summer, there was a one-time jump in inflation, but at the same time it also restrained consumption, which helps to reduce inflation in the longer term, reads the economic paper’s analysis.
Tags: