In its 2026-31 Programme for Government, the Scottish Government announced its intention to introduce a Bill that would “establish legal price ceilings on some essential food items”.
This blog explores some of the economic theory on price caps and evidence from two recent examples of food price caps in Europe. It was written by Heidi O’Keeffe, an Economic Futures placement student with SPICe.
Food inflation in the UK
Food inflation in the UK has been high in recent years. Between 2020 and 2025, food inflation averaged 5.5%, more than double its average rate over the previous three decades.
Staple items have experienced particularly sharp price increases: the average price of a pint of milk rose by 47.7% between January 2020 and January 2025. Inflation in food and other essential goods, particularly energy, contributed to falling real median household incomes between 2021-22 and 2023-24.
Figure 1: Cumulative change in food prices since 2020
Higher food prices have disproportionately affected lower-income households, for whom food accounts for a larger share of expenditure.
Recent conflict in the Middle East has increased energy prices and disrupted global supply chains, creating cost pressures which are expected to increase food inflation in the coming months. This might be exacerbated by falling crop yields resulting from high temperatures this summer.
Price ceilings: Theory
A statutory price ceiling is a maximum price that suppliers may legally charge for a good or service.
Under the proposal outlined in the SNP’s 2026 manifesto, the legislation would establish a statutory price ceiling on a “basket of 20 to 50 essential food items” at “large supermarkets”.
Price ceilings are typically introduced to improve access to essential goods and services in markets where prices are considered to be excessively high, owing to market power of firms or to temporary shocks such as conflicts or extreme weather.
To be effective in making essential goods more affordable for consumers, a price cap must be set below the current market price. The Institute for Fiscal Studies (IFS) highlights that the effects of such a policy depend largely on why prices are high.
- If prices are high because firms with market power are able to ‘markup’ prices well above their costs, a price cap can reduce prices to more competitive levels. Firms can continue to supply the market provided the capped price remains above their costs. However, if the price cap is set too low such that production is no longer sufficiently profitable, production of the affected items might fall over time.
- If the food industry is already competitive and higher prices primarily reflect increased costs, price caps may prevent firms from recovering those costs. In this case, some firms may reduce production or withdraw products from sale altogether. Given that lower prices should also increase demand for capped products, this raises the risk of shortages of essential food products. Firms may seek to offset lost revenue by increasing the prices of uncapped products, or by reformulating products to reduce production costs, which may affect their quality.
Inflation or ‘greedflation’: do higher food prices reflect rising costs or increasing profit margins?
Firms across the food supply chain have faced significant cost pressures in recent years. These include:
- Energy: Rising energy prices following Russia’s full-scale invasion of Ukraine has increased costs across the food supply chain. Agricultural production and food manufacturing are energy-intensive industries, making them particularly exposed to higher energy costs. More recently, red diesel prices (used to power agricultural machinery) increased by around 80% following the escalation of conflict in the Middle East.
- Fertiliser: Similarly, the cost of fertiliser increased sharply following Russia’s full-scale invasion of Ukraine in 2022, as a by-product of gas production. The Food and Drink Federation’s most recent food inflation forecast suggests that the fertiliser market remains tight amid recent tensions in the Middle East.
- Commodity prices: Global agricultural commodity prices rose substantially during 2021 and 2022. The European Central Bank has suggested this is a result of stronger global demand as well as climate shocks. Russia’s full-scale invasion of Ukraine also disrupted global supplies of wheat, other grains and vegetable oil (of which Russia and Ukraine were significant producers), contributing to sharp price increases.
- Labour: Labour costs have increased as the National Living Wage has risen by 40% since April 2020. This is likely to have been particularly significant for retailers, which employ large numbers of minimum-wage workers. The Competition and Markets Authority (CMA) has noted that labour shortages due to EU workers leaving the UK and workers leaving the labour force following the COVID-19 pandemic have created further upward pressure on wages across the supply chain.
- Transportation and packaging: higher prices for energy and raw materials, together with disruption to global supply chains and global shipping routes caused by the COVID-19 pandemic and conflicts in Ukraine and the Middle East, have increased costs of transportation and packaging.
- Brexit: Additional regulatory requirements have increased transaction costs in EU-UK trade. For instance, research by the London School of Economics estimates that additional border controls alone increased UK food prices by 6% in 2021.
The CMA has investigated to what extent rising grocery prices also reflect weak competition in the retail and manufacturing sectors by analysing firms’ profitability over the recent period of high inflation.
In grocery retailing, the CMA found that average operating margins fell from 3.2% to a “historically low” 1.8% between 2021-22 and 2022-23, indicating that supermarkets absorbed some of their rising costs instead of passing them on in full to consumers.
Overall, the CMA found no evidence that recent food inflation had been driven by weak competition between retailers. Rather, strong competition from discounters Aldi and Lidl as well as consumers’ willingness to shop around for lower prices has constrained supermarkets’ “ability to raise prices without losing market share”. Although retailers recovered their margins somewhat as input costs eased in 2024, the CMA reiterated that competition remained effective and that firms faced continued pressure to pass on cost savings to customers.
In the manufacturing sector, findings were more mixed. Strong competition between ‘own-brand’ manufacturers for retail contracts kept margins low (below 4%) and declining between 2020-21 and 2022-23, indicating that these firms also absorbed part of the increase in input costs. By contrast, many branded manufacturers increased their profitability during this period, suggesting that these firms increased prices by more than the rise in their costs.
On balance, a food price cap would be expected to apply primarily to lower-cost own-brand products rather than premium branded goods. However, the CMA found no evidence that weak competition had contributed to rising prices in this part of the market. If higher prices for these products primarily reflect increased production costs rather than firms’ market power, a price cap could have unintended consequences for their supply, as discussed above.
Evidence from Europe
Examples of comparable price ceiling policies are limited, as statutory price controls are relatively uncommon in market economies. However, both Hungary and Croatia introduced price caps on selected essential food products in response to sharp increases in food price inflation in 2022. Available evidence suggests that price caps had a limited impact on overall food inflation overall but did improve access to essential goods for lower-income households.
In Hungary, the prices of six staple food items were capped between February 2022 and July 2023. The government established ‘quantity floors’, requiring retailers to sell at least the average daily volume of capped goods that were sold in October 2021, to prevent retailers from withdrawing less profitable capped products from their stores. While this may have reduced the risk of shortages at the retail level, it would not have prevented shortages arising elsewhere in the supply chain.
Kabos and Smith (2025) find that sales of price-capped milk tripled following the introduction of price caps in Hungary, while sales of many other capped goods saw little change. Some retailers introduced quantity limits on purchases to discourage stockpiling. Although all households increased their consumption of price-capped goods, the increase was larger among lower-income households, suggesting that the policy was relatively effective in improving access to essential goods.
However, the price caps were not found to have a significant impact on overall food price inflation. In fact, evidence suggests that the policy had the unintended effect of driving up prices of uncapped substitute products faster than overall inflation, as retailers sought to offset their losses on staple food items. In 2022, the governor of the Hungarian National Bank warned that this alone may have added 3-4 percentage points to inflation.
In Croatia, statutory price caps were introduced in 2022 and had been expanded by 2025 to cover 100 essential food and hygiene products. The European Commission concluded that while the caps “temporarily slowed price growth for food categories containing price-capped products”, this effect was no longer evident by 2024.
Summary of potential impacts
Potential Benefits | Potential Costs |
Improves affordability of essential food items, potentially improving access to a balanced diet. | Lower supply of capped products if producers or retailers cannot recover their costs, increasing the risk of shortages. |
May reduce food poverty and material deprivation among lower-income households. | Higher prices for uncapped products if producers or retailers seek to recover lost revenue elsewhere, potentially increasing inflation for non-capped food items. |
May raise real incomes (all else equal), particularly for low-income households who spend a larger share of income on food and have faced higher-than-average inflation. | Lower product quality is possible if producers decide to reformulate products to reduce production costs. |
Smaller retailers which are not subject to statutory price caps may be placed at a competitive disadvantage if they cannot match capped prices available at supermarkets. | |
Reduced profitability and investment across the supply chain could undermine the viability of domestic food production in the long-run, with potential implications for food security. |
Heidi O’Keeffe, Economic Futures Placement Student with SPICe