What a difference a year makes.

Speaking in May 2022 at a conference in Vienna, Bank of England Governor Andrew Bailey hit back at critics who accused him of being asleep at the wheel as inflation was taking off. Noting that the nature of the shock of the Covid pandemic meant higher interest rates could damage the economy, he said elevated energy prices would depress consumer spending and allow the central bank to take a less aggressive approach to raising interest rates which at that time were pegged to a base rate of 1 per cent.

Fast forward to last week and, under questioning from the Treasury Select Committee on the latest base rate increase to 4.5%, Mr Bailey conceded the BoE had “some very big lessons” to learn in how to operate monetary policy in the face of massive shocks. The central bank’s chief economist, Huw Pill, acknowledged that forecasts for inflation were “too low” and led to errors in decision-making.

The Herald: Andrew BaileyAndrew Bailey (Image: Getty)

Households are now getting some relief as energy prices have partially abated, with the price cap set by industry regulator Ofgem to fall to £2,074 from July, more than £400 below the UK government’s current Energy Price Guarantee designed to partially shield consumers from the worst of surging bills. That said, the average household will still be paying almost double the rate for gas and electricity than prior to the escalation in wholesale costs.

With the 50% surge in retail energy prices in April 2022 dropping out of annual calculations, there was never any doubt that the overall rate of inflation would ease when the Office for National Statistics (ONS) issued its newest monthly data last week. Yet the latest Consumer Price Index (CPI) reading of 8.7%, down from 10.1% in March, was still higher than pretty much anyone expected as alarmingly expensive food looks set to overtake energy bills at the epicentre of the cost-of-living crisis.

Following the Treasury Select Committee’s efforts to pass off the inflationary buck to Mr Bailey and his colleagues on the Monetary Policy Committee (MPC), Prime Minister Rishi Sunak’s government is now keen to be seen to be “doing something” about soaring supermarket prices. According to the ONS, the price of food and non-alcoholic drinks jumped by 19.3% during the 12 months to April, the second-highest rate in 45 years.

READ MORE: Energy prices: Households pay as the UK gambles on volatile gas market

One potential solution on the drawing board is a voluntary cap on the price of basic food items. According to widespread reports, the Treasury and the UK’s major grocery retailers are in discussions about a scheme to set maximum prices for certain goods following an emergency food security summit earlier this month.

The plan appears to be modelled on an agreement reached recently by the French government and that country’s food retailers to set the “lowest possible price” on a number of everyday products for an initial three-month period. Under the scheme, announced in March, retailers can select the items to which this applies.

MPs and retailers in the UK have lambasted the idea, with critics drawing parallels to price controls under the early 1970s government of Conservative Prime Minister Edward Heath.

The big supermarkets are still posting hundreds of millions in profits even as they insist they are doing all they can to shield customers from the full impact of rising costs. Meanwhile, many producers and manufacturers claim they are being pushed to the financial brink as they can’t make enough to cover higher prices for energy, labour, feed and fertiliser.

The Herald:

This raises concerns about the knock-on impact of a voluntary price cap down through the supply chain, and whether maximum prices on some goods would trigger higher prices for others.

“While [supermarkets] might be willing to regard some basic foods as ‘loss leaders’ for positive publicity, they may also compensate for price controls by reducing quantity or quality, and by raising prices for ‘uncapped’ goods,” said Julian Jessop, economics fellow at the right-wing Institute of Economic Affairs.

“It is not even certain that the prices of capped goods would end up lower than if there were no cap. Supermarkets may simply price to the cap, and not cut prices further even if falling costs allowed it.”

Andrew Opie, director of food and sustainability at the British Retail Consortium, maintains that the plan “will not make a jot of difference to prices” because inflation is the direct result of energy, transport and labour costs. Unfortunately, pressure on all these fronts has been exacerbated in the UK by the government’s short-term approach to energy policy, and the withdrawal from the European Union.

Brexit has been a primary driver of labour shortages that have left UK crops to waste in fields and hampered producers in need of manpower to process and package food. It has also contributed to additional paperwork on food imports, even before the introduction of the full range of checks and formalities due at the end of this year.

READ MORE: Higher food prices 'baked in' as shoppers seek inflationary relief

A report last year from the Centre for Economic Performance found that Brexit was contributing to higher food costs in the UK even before the latest surge in prices. Researchers estimated a 6% increase during the two years to the end of 2021, with products such as fresh pork, tomatoes and jams that come mainly from the EU experiencing the largest price increases.

On the energy policy front, the UK has for decades failed to invest in the kind of long-term infrastructure that would have at least cushioned it from shocks across wider global markets. The closure of the Rough gas storage facility in 2017, taking with it more than 70% of the UK’s gas storage capacity, is testament to this.

There is blithe indifference to these self-inflicted wounds among government leaders, who are too quick to point the finger at “external factors” in this cost-of-living crisis. A voluntary food price cap is gimmickry of the highest order and should not camouflage the fundamental shortcomings.