Price Controls Against Inflation

Price Controls Against Inflation

Why State-Regulated Prices Are Becoming a Policy Necessity

When companies raise prices, it is primarily poorer households that suffer. In light of the high inflation rates in Europe and the USA in recent years, we are witnessing a renaissance of price controls. For a long time, they were considered taboo, as neoliberal economic theory assumes that prices are supposedly formed freely by supply and demand. But especially in times of crisis, the state must intervene and cap prices to protect wage earners from excessive burdens. However, it matters, how this is done.

In Germany, price controls are hardly discussed publicly. Politically directed or negotiated prices, such as the “Deutschlandticket” for regional public transport, are considered exceptions. In both economic policy discussions and everyday thinking, the dominant idea is that supply and demand in a freely competitive market determine prices. This is essentially a silly notion, as in reality there is neither pure, free competition nor prices that are not politically influenced.

The conditions of production are always shaped in various ways by state policy. The only question is whether the state also directly intervenes in price formation for certain goods by setting upper or lower price limits. The minimum wage, for example, is a state-set minimum price for labor power. It is the result of political pressure from trade unions and the political left and a necessary measure to ensure that workers can somewhat secure their livelihood (and thus the reproduction of labor power) where collective bargaining agreements or other regulations do not apply. Rent controls for social housing are a long-standing example of state-imposed price ceilings in Germany.

Two Types of Price Controls

Two types of price controls must be distinguished: First, the state can set specific upper or lower price limits. Companies are then bound by these legal requirements in their pricing. However, in a capitalist society, the state cannot arbitrarily set prices; for companies to produce goods at all, prices must at least cover costs. Moreover, since they are capitalist companies, they must also be able to earn a normal profit in the long run. Particularly when the affected goods become scarce, there is a risk of a black market emerging with higher prices. Foreign companies also cannot be easily forced to supply a market at fixed prices—unless the market is indispensable to them due to its size. The state must therefore ask itself whether it can even enforce price limits.

This is where a second type of price control comes into play: the state limits prices for consumers by subsidizing them, that is, by paying the difference between the higher market price and the lower, politically determined price. This raises questions about how such price subsidies are financed and how this financing affects income distribution.

The economist John Kenneth Galbraith was involved in the conception and implementation of price controls in the USA during the 1940s and 1950s. In his 1952 book A Theory of Price Control, he writes that in certain situations, governments have no choice but to introduce price controls. For products with only a few suppliers, they are relatively easy to enforce. In markets with many providers, prices are often increased illegally or goods are traded on black markets. Effective enforcement of price caps then requires a large authority capable of closely monitoring companies. Additionally, supporting measures such as the formation of state reserves, state rationing, or product distribution may be necessary to ensure supply to the population.

Price Controls Aim to Ensure Stability

In capitalist periphery states, price controls for goods like staple foods or fuel play a far greater role than in the centers. State-set price ceilings for essential goods are a vital tool for maintaining the stability of the ruling order, particularly where most people have precarious incomes, inflation is high, and poverty is widespread. At the same time, state-subsidized prices are contested even in these countries. On one hand, the International Monetary Fund often ties loans for Global South countries in financial crises to the removal of subsidies for basic goods. On the other hand, popular uprisings frequently occur when prices for essential goods are raised.

Rising unemployment and falling wages as a result of higher interest rates are desired by mainstream economic policy during periods of high inflation.

Recent experiences in Germany also show that people with low incomes suffer most from high inflation. The dominant method of combating rising prices is raising interest rates by central banks. This makes loans more expensive and increases the requirements for profitable investments. As a result, investments are reduced, economic growth is slowed, and pressure on incomes increases. The underlying assumption is that prices rise because demand exceeds supply. If supply cannot be increased, then purchasing power must be restricted to reduce demand and prevent further price increases.

Thus, rising unemployment and falling wages due to higher interest rates are even considered desirable by prevailing economic policy in times of high inflation. The working class, in this scenario, jumps from the frying pan into the fire: Inflation harms workers, but the remedy promoted by those in power harms them just as much. This raises the question of whether there are alternatives to interest rate hikes in fighting inflation. This is where price controls come in.

Historically, even industrialized countries in the Global North have made extensive use of price controls, particularly during wartime. During World War II, they were widespread. In the USA, price controls remained in place through the Korean War in the early 1950s and during the height of the Vietnam War from 1971 to 1974. In West Germany, state price regulation played an important role well into the 1950s due to supply shortages and high inflation.

Free Competition Is an Illusion; Oligopolies Are the Reality

Proponents of the “free market economy” see price controls as policies that interfere with the forces of supply and demand and lead to inefficient or even wasteful use of scarce resources. However, in the modern capitalist economy, free competition is an illusion. Over the last 200 years, capitalist dynamics have led to the emergence of giant corporations that dominate entire industries. What we face is not perfect competition as described in neoclassical textbooks, but oligopolies where companies have significant price-setting power.

Furthermore, wage earners, due to their subordinate position in capitalist production relations, are forced to organize collectively in unions and politics to defend their interests. Class struggle, for example, takes the form of collective bargaining for wages and working conditions. This, too, contradicts neoclassical economic theory, which views collective wage bargaining as an obstacle to free competition. State intervention through price controls thus takes place in a reality already shaped by concentrated market power—not by perfect competition.

Expensive and Socially Unequal: The Example of Germany’s Energy Price Caps

Economist Isabella Weber deserves much credit for bringing price controls back into the policy discussion. In December 2021, she proposed strategic price controls to combat inflation in The Guardian. Initially, her proposal was sharply rejected—even by Keynesian economists like Paul Krugman, who later changed his mind. In February 2022, she and Sebastian Dullien, chief economist at the union-affiliated IMK (Institute for Macroeconomic and Economic Research), proposed a gas price cap. The German government eventually adopted the idea, but only after six months. The Spanish government acted more quickly, capping electricity and gas prices and thus managing inflation more effectively.

While the Left Party (Die Linke) had advocated early on for capping electricity and gas prices, the governing coalition (SPD, Greens, FDP) initially pursued the opposite approach. In response to skyrocketing gas prices following Russia’s invasion of Ukraine, the government introduced a gas surcharge in October 2022 to raise prices further—intended to fund bailouts for gas importers like Uniper. After heavy criticism, the government abandoned the surcharge and shifted to tax cuts and one-off payments to alleviate the burden on citizens. These measures, however, were insufficient, especially since they mostly benefited higher-income groups.

Germany’s electricity and gas price caps came too late and ended too early.

On September 23, 2022, the federal government established the “Gas and Heating Expert Commission” to design a gas price cap. However, the commission included opponents of state price controls who blocked effective measures. Ultimately, the government introduced electricity and gas price caps starting January 2023, but they expired by the end of the year as prices declined and the coalition failed to agree on financing. Due to the debt brake and the Constitutional Court's ruling against reusing emergency COVID funds, the fiscally conservative FDP prevailed, backed by many economists and business groups.

Not only were Germany’s energy price caps poorly timed, but their design was also flawed. They aimed to reduce costs for households and companies based on their 2021 gas consumption. The state covered the difference between the market price and the lower fixed price—but only for 80% (households and small firms) or 70% (larger companies) of their 2021 consumption.

Although the scheme included an ecological incentive—since users had to pay full price for excess consumption—it had two major drawbacks. First, it used a “watering-can principle”: those with high gas usage received more relief, those with less received less. A more socially just model could have subsidized a basic energy allowance per household or per person. Second, using 2021 consumption as the basis offered no incentive for companies to continue production. Large industrial firms had often already shut down due to high costs. Some economists even advocated for “hibernation bonuses” for idle firms to avoid market distortions—though this was eventually scrapped after public backlash.

Larger companies also faced conditions: from €2 million in subsidies, firms had to prove employment guarantees until April 2025 or maintain 90% of staff. From €25 million, management bonuses were banned; from €50 million, dividend payouts were prohibited. These restrictions likely deterred large companies from applying. While households received around €13 billion through the gas cap, large firms got under €1 billion—despite equal budgets originally planned for both groups.

The caps helped relieve small businesses and households and reduced uncertainty. But a more socially and ecologically balanced design would have been better. That didn’t happen due to time pressure, neoliberal influence, and lack of data on household and company structures. Most of all, excess profits earned by many firms during the energy crisis were not adequately taxed.

When Prices Rise, Price Controls Must Be Fought For

The major wave of inflation that began in 2021 due to the disruptions caused by the COVID-19 pandemic and was intensified by the consequences of the war in Ukraine has initially subsided. In addition to increased interest rates, measures such as the energy price caps and the introduction of the "9-euro ticket"—and later the "Deutschlandticket"—also contributed to this development. However, rising inflation rates could soon become a burden again. We are living in a time of multiple crises, and there are several factors that could contribute to rising inflation in the global economy in general and in Germany in particular:

1. First, the ruthless exploitation and depletion of natural resources will sooner or later lead to enormous price increases. The more difficult it becomes to access raw materials and the more labor-intensive their production becomes, the more productivity will decline. The usual mechanisms of price formation—including speculative trading on commodity markets—will, even before reaching "peak everything" (the production maximum of various raw materials), cause prices to rise drastically.

2. Second, among the non-reproducible resources is land. If the formation of land prices continues to be left to the market and the state does not intervene effectively, land prices will keep rising sharply. The associated increase in rents constitutes the largest cost burden for wage earners and drives up the price of labor power—unless it results in decreased spending in other areas, i.e., in a lowered standard of living for wage earners.

3. Third, increasing geopolitical tensions and the changing political response to them are leading to higher costs. The protection of domestic markets—through tariffs and economic sanctions—is on the rise. In the case of sanctions, their circumvention via intermediaries and longer transportation routes increases costs. Moreover, a growing share of societal resources is being diverted toward militarization and is thus unavailable for production in other sectors. This new international constellation generally leads to upward pressure on prices.

4. Fourth, demographic shifts in the old capitalist centers are causing labor shortages. These could be mitigated by greater labor force participation from women and through immigration, but conservative and reactionary sociopolitical orientations are making that more difficult. In the short term, the labor shortage could improve the bargaining position of wage earners vis-à-vis capitalists. However, this may also pressure the latter to raise prices in order to maintain their profit rates.

The more inflation spreads, the more important price controls will become. How price controls affect income distribution depends on which prices are controlled, how they are controlled, and whether wages or profits are capped. Accordingly, the implementation and design of price controls during periods of high inflation is a key arena of class struggle.

Literature

Dullien, Sebastian/Weber, Isabella (2022a): Der Staat muss den Gaspreis deckeln, in: Süddeutsche Zeitung, 12.2.2022.

Dullien, Sebastian/Weber, Isabella (2022b): Mit einem Gaspreisdeckel die Inflation bremsen, Wirtschaftsdienst 102,154–155.

Fuhrmann, Uwe (2017): Die Entstehung der «Sozialen Marktwirtschaft» 1948/49. Eine historische Dispositivanalyse, Konstanz/München.

Galbraith, John Kenneth (1980): A theory of price control, Cambridge, MA.

Krebs, Tom/Weber, Isabella (2024): Can price controls be optimal? The economics of the energy shock in Germany, Working Paper Series Nr. 597, Amherst, University of Massachusetts.

Weber, Isabella (2021): Could strategic price controls help fight inflation?, in: The Guardian, 29.12.2021.

Weber, Isabella/Beckmann, Thore/Thie, Jan-Erik (2023): The tale of the German gas price brake: Why we need economic disaster preparedness in times of overlapping emergencies, in: Intereconomics 1/2023, DOI: 10.2478/ie-2023-0004

Witt, Uwe (2023a): Wirken die Gas- und Strompreisbremsen? Bestandsaufnahme und Bewertung der staatlichen Entlastungspakete, Kommentar, 31.1.2023, Rosa-Luxemburg-Stiftung, Berlin.

Witt, Uwe (2023b): Übergewinnsteuern laufen ins Leere. Zwei Seiten einer Medaille: Extrem akkumulierter Reichtum und bittere Armut, Kommentar, 30.1.2023, Rosa-Luxemburg-Stiftung, Berlin.

Zündorf, Irmgard (2006): Der Preis der Marktwirtschaft. Staatliche Preispolitik und Lebensstandard in Westdeutschland 1948 bis 1963, Franz Steiner Verlag