Price caps are pointless – why Reeves is wrong to attack supermarkets

Added: 2026-05-27

[00:00:00]The government has ditched reported plans to try to impose price caps on food in supermarkets.

[00:00:06]But why were they even being considered?

[00:00:09]Some would say they're a sensible measure given food inflation could soar this summer, but others would call it insane economics. And are supermarkets really gouging profits anyway? Hello and welcome to Reality Check. I'm Michael Simmons, the spectators economics editor.

[00:00:27]Britain could be heading for a summer of really expensive food. Even if the straight of Hormuz were to reopen right now, shipping companies have been pretty clear that they're not going to just start sailing on down again. And that's got consequences with the worst inflation forecast saying that food prices could surge by 10 or 11% this summer. And our embattled government feels it has to act. And its latest target is supermarkets. But it's not just supermarkets that are under attack.

[00:00:57]In an article for the Times last week, Rachel Reeves talked about the scourge of price gouging. And she said that she's instructed regulators to name and shame the firms that are making an excess profit off the back of the Iran war. But I think the chancellor is being a bit cynical here. She's taking advantage of the profit margin, the price gouging myth. The Institute of Economic Affairs carried out this really interesting poll where they asked members of the public a simple question.

[00:01:27]It was kind of a quiz. They asked them to guess the profit margins of different sectors of the British economy. And the public were rubbish. Take the public's guess for energy companies. They thought they were making profit margins of 57%.

[00:01:42]The reality just 5 to 15%.

[00:01:46]For airports and airlines, they thought again a 50% profit margin. the truth, just 2 to 8%. Train companies, their guess 45%. In reality, 1 to 5%. And of course, you guessed it, the same was true for supermarkets, with the public estimating that Tesco, Waitro, M&S, and their competitors make a 50% profit margin on every item of food they sell.

[00:02:12]But the truth is nowhere near that, with the industry average for the supermarket sector sitting as low as 2%. I think Reeves is exploiting this public misunderstanding for political gain. So I spoke to Matthew Leash of Freshwater Strategy who were the pollsters who conducted the poll to find out more.

[00:02:31]>> Well, look, supermarkets are quite frankly nothing short of a modern miracle. I mean, if if our if our forefathers could see just the variety and and extraordinary depth of what we can get from all over the world um in one place at reasonable prices, I I think they'd be absolutely shocked um by what they've achieved for us. So maybe what the public are getting wrong here is how grateful we really should be for supermarket because the truth is they bring incredible efficiencies because of the fierce competition between them.

[00:03:04]Remember, they're making margins of just 1 or 2%. So, they have to get everything right to save costs elsewhere. And the effect of that is it's drastically brought down food costs in Britain. In fact, the proportion of household spending that goes on food is actually near record lows. For example, it's fallen from nearly a third of everything people spend in the late 50s to just over 10% today. The result is that in Britain, we actually have some of the lowest food prices in the developed world. I spoke to Andrew Opie of the British Retail Consortium to understand how the supermarket has actually been so successful in bringing prices down and how they feel they're treated by the government.

[00:03:47]>> Well, I think governments should look at two things. First of all, um they own reports that have been prepared for them by their independent regul regulators, their independent competition regulators, the CMA, which has looked very closely at the grocery market in the UK and has published uh two reports in the last few years which have absolutely um endorsed the approach that supermarkets take on behalf of customers. In other words, that intense competition driving for the best value for customers actually does work. and therefore we're very lucky in this country to have the lowest grocery prices in Western Europe. The second thing is rather than trying to interfere in what is a very very effective market, they should look at some of their own interventions um whether that's around regulatory costs, whether that's around things like packaging costs that they have put into the system which then have to be paid by us as customers because those costs will be passed on in prices.

[00:04:42]So the government should probably be focusing on what it can do and leaving what is probably the most effective grocery market in the world to do what it does really well which is serve customers with really great value prices.

[00:04:56]>> Um and just finally um forgetting the government and politicians for a minute, do you think we as shoppers um should love our supermarkets more and be be more grateful for for what we've got?

[00:05:09]Yeah, we're very very lucky in this country as I've said, you know, compared to the rest of Europe and globally, not only have we got great prices, but we got great value because our farmers and our suppliers, mainly here in the UK where we source, are fantastic at what they're doing. So, we as customers are really fortunate to get a huge range of products at great value. And if we think back over the decades, we used to spend about a third of our income on food. The fact that the supermarkets have driven competition and our suppliers have risen to that challenge has meant now we spend about 11 12% of our income on food. So if we if as customers we should be celebrating supermarkets and their suppliers and the British farmers for doing a fantastic job. There are many many other costs that customers have to pay where markets do not work anywhere as well as supermarkets. That's probably where they need to focus and just enjoy the products that they can buy in every British supermarket.

[00:06:09]>> This episode of Reality Check is sponsored by Arteimus Fund Managers.

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[00:06:45]Artemis, the profit hunter. Be a hunter, not a tracker. As with all investments, your capital is at risk. So when prices do rise in the summer, and evidence suggests they will, there just isn't any evidence to suggest that it's supermarkets that are price gouging or making excess profits off the back of it. The competition between them simply prevents that. And we see this in past inflationary shocks, too. that inflation at the factory gates, what we call input producer inflation, does not tend to be passed on to customers to extreme amounts. But even if supermarkets were out of control, I'm not sure price fixing by state dictat is really the answer. Everything we know about economic history tells us that it just doesn't work. The price signal helps to manage supply. When things get expensive, it means there isn't enough of them. So, it tells producers to make more if they can. And it also guarantees quality. And more importantly, the competition between supermarkets, as we've heard in this episode, makes food from anywhere in the globe way more affordable for us in Britain than it otherwise would be. And indeed, some even say that supermarkets played a part in destroying the Soviet Union. I mean, it's even said that it's thanks to supermarkets that we saw the fall of the Soviet Union. And it was, of course, Russian President Barson when he was visiting a supermarket that was in Texas where he saw the shelves packed with a diversity of choices that led him to then really question the whole Soviet system. and he he wrote in his own biography that it shattered his belief in communism and led to contributed to reforms of course that then led to the fall of the Soviet Union. So I think it's really hard to underestimate the importance and power and contribution that supermarkets make to humanity.

[00:08:45]Seems to me that politicians love the language of price gouging because it brings ethics and morality into what is just simple economics.

[00:08:55]They want there to be villains because there are victims and the government wants to ride to the rescue rather than admitting that it's got very little influence.

[00:09:06]But supermarkets are our biggest competitive success story. They've got low margins and intense competition. And that's shown by decades of falling food costs. Supermarkets just aren't the cause of inflation. They've actually been protecting us from it. They're the reason that food has stayed as cheap as it has. Thank you for watching and listening to this episode of Reality Check. If you're watching us on YouTube, don't forget to subscribe and tap the bell so that you never miss an episode.

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