Britain is getting so desperate to tame inflation it's talking about food price caps

Brits woke up to yet more grim news on inflation Tuesday, with new data showing prices in UK stores are rising at a record pace. It's the latest sign of a seemingly intractable cost-of-living crisis that has Prime Minster Rishi Sunak considering drastic measures, including price controls, to keep inflation in check.

The cost of store items, known as shop price inflation, rose 9% through the year to May, a fresh high for an index that dates back to 2005, according to the British Retail Consortium. Food inflation dipped slightly to 15.4% in May, but that's still the second-highest rate on record.

Lower energy and commodity costs helped reduce prices of some staples, including butter, milk, fruit and fish. But chocolate and coffee prices are rising as global commodity prices soar, British Retail Consortium CEO Helen Dickinson said.

The slight drop in food prices will give cold comfort to consumers, and piles the pressure on Sunak, who has promised to halve inflation this year as one of his five pledges to voters.

The British public "are still wincing when their total comes up at the checkout… a weekly shop that cost £100 last year is now clocking in at £115," Laura Suter, head of personal finance at stockbroker AJ Bell wrote in a note.

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Poor households are being hit the hardest because they spend more of their disposable income on food. More people are using food banks in the United Kingdom than ever before, eclipsing even the peak of the pandemic.

The Trussell Trust, the UK's biggest food bank network, handed out close to 3 million emergency food parcels over the 12 months to March 2023 — a 37% increase on the previous year.

Even the Bank of England, tasked with keeping inflation at 2%, has been caught off guard by stubbornly high food prices, which seem to have barely responded to 12 successive interest rate hikes.

Food prices have contributed to keeping inflation "higher than we expected it to be," Bank of England Governor Andrew Bailey told a Treasury committee hearing last week. "We have a lot to learn about operating monetary policy in a world of big shocks," he admitted.

The United Kingdom's inflation problem is now so dire that Sunak is considering asking retailers to cap the price of essential food items, in a throwback to the 1970s. Back then, governments in the United States and United Kingdom imposed wage and price controls to tame inflation, although the policies weren't very effective at bringing inflation down and were later dropped.

Economists say that capping prices encourages companies to produce less of a product, while making it more attractive to consumers. Supply goes down, and demand goes up, with shortages being the inevitable result.

Price controls distort markets and should only be used "in extreme circumstances," Neal Shearing, group chief economist at Capital Economics, wrote in a note Tuesday. "The current food price shock does not warrant such an intervention," he added.

The Sunday Telegraph was first to report the government's proposal, which was quickly rejected by retailers.

Andrew Opie, director of food and sustainability at the British Retail Consortium said controls would not make a "jot of difference" to high food prices, which are the result of soaring energy, transport and labor costs.

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"As commodity prices drop, many of the costs keeping inflation high are now arising from the muddle of new regulation coming from government," Opie added in a statement. These include tighter rules on recycling and full border controls on food imports from the European Union, due to be implemented by the end of this year.

According to a government spokesperson, any price caps would not be mandatory. "Any scheme to help bring down food prices for consumers would be voluntary and at retailers’ discretion," the spokesperson said in a statement shared with CNN.

Sunak and Finance Minister Jeremy Hunt "have been meeting with the food sector to see what more can be done," the spokesperson added.

For Sunak, the pressure is on — particularly ahead of a general election widely expected to be held next year. Inflation was hovering above 10% when he made the promise to halve it in January. It dropped back to 8.7% in April, still well above his target. The Bank of England expects it to fall to "around 5%" by the end of this year, leaving little margin for error.

According to Opie of the British Retail Consortium, the government should focus on "cutting red tape" rather than "recreating 1970s-style price controls."

At the top of the list of burdensome regulations are those introduced as a result of the country's exit from the European Union, which is its main source of food imports.

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Brexit is responsible for about a third of UK food price inflation since 2019, according to researchers at the London School of Economics.

New regulatory checks and other border controls added nearly £7 billion ($8.7 billion) to Britain's domestic grocery bill between December 2019 and March 2023, or £250 ($310) per household, economists at the LSE's Centre for Economic Performance wrote in a recent paper.

Food prices rose by almost 25 percentage points over this period. "Our analysis suggests that in the absence of Brexit this figure would be 8 percentage points (30%) lower," the researchers wrote.

Imports of meat and cheese from the European Union were now subject to high "non-tariff barriers."

— Mark Thompson contributed reporting.