Britain’s war on supermarket prices is what happens when years of high inflation make politicians economically unserious.

The Treasury has reportedly asked large grocers to cap the price of staples such as bread, milk and eggs in return for regulatory relief, in a (nudge nudge, wink wink) “voluntary” arrangement. It is extraordinary. After years of pretending inflation was just a series of passing supply hiccups, policymakers now face households furious about the permanent jump in the price level. And with Donald Trump’s Iran war threatening another cost spike on food and inputs like fertiliser, ministers are staring at the most politically visible prices in Britain and asking supermarkets to make them less embarrassing.

Rising food prices hurt, obviously. Official figures show food and non-alcoholic drink prices up 3.0 percent over the year to April, down from 3.7 percent in March. That may rise again. But the notion that ministers can meaningfully ease household budgets by leaning on supermarkets to suppress a few staple price increases is delusional. Money is fungible. Groceries feel especially painful because housing and energy — the big-ticket costs that also feed through into everything else — are devouring pay packets. The best medium-term food relief would not come from Treasury price lists, but from building more homes and rethinking net zero costs, thereby leaving households with more disposable income for everything else.

Especially because there’s no large supermarket profit reservoir waiting to be tapped. British food retail is brutally competitive, low-margin, high-volume business, selling a raft of different products at different price points. The Competition and Markets Authority found average operating margins for Tesco, Sainsbury’s and Morrisons of about 3.0 percent in 2023/24, with discounters lower still. Tesco’s £2.4 billion pre-tax profit sounds scandalous only to people who do not understand denominators. On more than £70 billion of revenue, it is evidence of scale, not monopoly rents.

That means shareholders will not be footing the bill for “voluntary” price controls that force participating firms to sell some products at a loss. Someone else will. If ministers promise to protect farmers and other suppliers, while keeping retailers whole, the costs must land on other customers, taxpayers, or suppliers outside the covered categories. Indeed, that the state proposes reimbursing big grocers by relaxing regulations or delaying levies proves really this is redistributing pain rather than eliminating it.

Yet protecting retailers’ bottom lines does not make price controls harmless. The objection is not that floating prices be allowed to fatten profits. It is that prices are information. A rising egg price tells millions of people, in a single number, that feed costs, energy costs, disease, logistics or demand conditions have changed. That signal encourages economising, substitution, better stock management and new supply. A price cap, in contrast, lies. It tells shoppers that scarce goods are more abundant than they really are.

The consequences would be a disaster. Set a price cap below the market-clearing level and quantity demanded exceeds quantity supplied. Supermarkets then either ration through queues, purchase limits, luck and loyalty apps, or they run out of stock. If basic milk, bread and egg prices are controlled, demand then spills into premium versions, substitutes and goes towards independent retailers. Those prices rise faster, given the extra demand. Large supermarkets invited into a “voluntary” scheme get regulatory indulgence and a halo of virtue. Smaller shops, without the same scale or Treasury access, will get accused of gouging if they charge market prices, given the CMA’s new powers.

That is not the end of it. When buyers and sellers are willing to trade at a higher price, many still will — only now in black markets that must be policed. Then comes the bureaucracy of the controls themselves. Is the Treasury really going to define which brands, pack sizes and line items qualify, monitor prices across thousands of shops, and punish non-compliance? What about when the suppliers themselves get involved amid contract renegotiations? All this takes time and vast resources.

The cope on this is “Britain has had price controls before.” But wartime controls are not a model for peacetime abundance. In war, economic efficiency is subordinated to defeating the enemy. Even then, controlled prices came with ration books, rafts of inspectors, subsidies, queues, criminalisation and black markets. The lesson of wartime is not that price controls work. It is that when prices are suppressed, liberty and convenience are sacrificed too in the service of the bigger goal of beating Nazis.

Nor will this tame inflation, whatever ministers claim. Ask the Hungarians. They capped the basics in 2022 and still suffered the highest inflation in the EU. Why? Well, because inflation is not a spreadsheet of individual prices that Whitehall can pin down one by one. It is a sustained rise in the general price level, arising when nominal spending runs ahead of productive capacity. Holding down a few selected prices does not really change total spending or the economy’s supply potential. It just distorts relative prices, shunts demand into uncapped goods, and lets ministers pretend they have fought inflation when they have merely rearranged it.

That this is even being considered in the UK is especially galling because government has spent years making food retail more expensive and less flexible. Higher employer taxes, aggressive National Living Wage rises, packaging levies, reformulation rules and restrictions on promotions have all added costs. Then add expensive energy policies, town-centre-first planning rules, arcane business rates and legal risks over warehouse and shop-floor pay. Ministers are squeezing one of Britain’s great consumer success stories — then blaming supermarkets when the costs show up on the shelf.

Britain’s supermarkets are not price villains. They are a world-class logistics machine, turning global sourcing, discount competition, data and ruthless inventory management into low prices. It is regrettable that past inflation and now the Iran war are pushing food costs higher. But suppressing that reality will not make it disappear. At best, price caps will hide scarcity, distort competition and deepen the fantasy that governments can legislate inflation away by fixing the prices of life’s basics.

That’s a remarkable development. Biden oversaw an inflation peak of 9 percent which Trump hasn’t approached, yet Trump’s disapproval has surpassed Biden’s worst. As two of us explained last month, Biden’s disapproval peaked after it became clear disinflation would stall above the Fed’s 2 percent target.

Voters didn’t just want lower inflation though; they wanted prices to fall. Trump promised exactly that before the 2024 election, telling a Pittsburgh rally, “A vote for Trump means your groceries will be cheaper.” Prices didn’t fall, and monthly inflation has yet to even hit the Fed’s target once under Trump (nor did it ever hit target the second half of Biden’s presidency). That alone explains much of the deteriorating approval across Trump’s first year.

More recently, inflation has accelerated again. The consumer price index increased 0.6 percent in April after rising 0.9 percent in March, meaning prices are up 3.8 percent in the past year. Energy prices led the pack, rising 3.8 percent in one month. The PCE price index, the Fed’s preferred inflation metric, rose 0.7 percent in March too, also driven largely by energy prices.

Some of those price rises were to be expected. War in Iran has driven gasoline prices 28.4 percent above year-ago levels, and that mostly explains the 20.7 percent surge in the highly salient airline fares. But the concern with oil shocks is that they can pass through into virtually all other prices. This is because oil products are common inputs in several industries and significantly determine the cost of transporting goods and services. The evidence suggests that such price pressure is already broad-based: core goods are up 2.7 percent from a year ago, services 3.3 percent, and groceries nearly 3 percent higher.

These numbers are particularly problematic for Trump given that this is an election year where affordability will be at the forefront of voters’ minds. Economists usually look to metrics like real earnings to measure affordability because they track whether wages have kept up with inflation. Those metrics are also gloomy. The BLS’s real earnings report shows real hourly earnings fell 0.5 percent in April. Some workers appear to be compensating by picking up extra hours—the average workweek rose 0.3 percent—but the combined effect is real average weekly earnings still fell 0.2 percent.

Until this month, despite inflation remaining stubbornly above the Fed’s 2 percent target, wage growth had outpaced price increases over the previous 12-month period. This recent inflation surge has now pushed consumer prices above cumulative year-on-year wage gains. April 2026 inflation caused real wage growth since April 2025 to dip negative, erasing any wage gains that had built up the 11 months prior. In aggregate, consumer goods are slightly less affordable today than a year ago—the first time this has happened in three years.

In January 2026, Trump’s net inflation approval was -27 percent. That’s bad but roughly where Biden ended his presidency. It’s now at -44 in an almost 20-point deterioration in just four months. With no relief in sight from either tariffs or energy prices, Trump’s already-historic inflation disapproval may have further yet to fall.

The Congressional Progressive Caucus yesterday released their “affordability agenda.” The American people want policies to defuse inflation and lower their living costs, but what they got was a longstanding left-wing wish list dressed up in affordability garb: more subsidies, mandates, price controls, state-directed production, and lawsuits against businesses that charge prices politicians dislike.

The agenda promises to cut costs for prescription drugs, utilities, gas, childcare, housing, and groceries; improve worker wellbeing with more paid time off and higher overtime pay; ban “surveillance pricing”; and abolish super PACs.

Two things stand out straight away from the list of proposals. First, nothing here would lower inflationary pressure as a macroeconomic phenomenon, which is what drove the affordability anger. Second, in specific markets, there’s scant economic analysis of the structural and policy factors that drive high prices. Most proposals implicitly blame villains like Big Oil, Big Pharma, Big Grocery, Big Tech, utilities, landlords, employers, and billionaires for high prices. This populism means many simpler ideas to lower prices through expanding supply get ignored.

Start with utilities. The so-called Lowering Utility Bills Act targets regulated monopolies where returns are set by regulators, not markets, and promises to lower bills by squeezing those administered returns further. Allowed equity returns would be pushed to the bottom of a federally defined “reasonable” range and certain cost recovery would be curbed. Disallowing lobbying expenses, political spending, private jets, and penalties from ratepayer bills will be popular, but will only marginally affect rates. The advertised $500 savings per household really depends on the indirect price controls, state regulators adopting similar policies, and the utilities absorbing this without creatively shifting the burdens. This means the savings are uncertain. And as power demand surges from data centers, electrification, and grid modernization, underpricing capital also risks deterring the very investment needed to make electricity cheaper and more reliable over time.

Gas prices are another hot issue today. Ro Khanna and Sheldon Whitehouse want a refundable “gasoline price rebate” income tax credit financed by a per-barrel excise tax on crude oil to ease households’ squeeze. They call it a tax on “windfall profits” because it kicks in when Brent crude prices rise above their 2025 average. But the policy only cushions some households after the fact, and then only when the rebate exceeds any pass-through they endure in higher fuel prices. It doesn’t lower the pump price. Indeed, by taxing barrels precisely when oil is scarce and prices are high — as now with the Iran war roiling global markets — it risks raising the marginal cost of crude supply into U.S. refineries.

Other proposals more obviously risk prices moving in the wrong direction entirely. The proposed clampdown on grocery store “price fixing” just empowers state attorneys general to pursue Robinson-Patman price-discrimination claims. In plain English, this would make it easier to sue suppliers for offering large retailers better wholesale deals than others. But those discounts are often how efficient retailers keep shelf prices low. Introduce that legal risk, and many suppliers won’t extend Walmart’s lower cost deals to everyone. They’ll just end them, worsening affordability.

Similar confusion arises in the Stop AI Price Gouging and Wage Fixing Act. It targets personalized online pricing, which unfriendly lawmakers call surveillance pricing and equate with price gouging. But, overall, we’d expect individualized pricing to mean lower prices for thrifty shoppers with a low willingness to pay and higher prices for those happy to pay more anyway. Legislation pressuring more uniform pricing would help the latter group—who would often be those on higher incomes—not those struggling to make ends meet. The net affordability effect for low-income consumers could well be negative.

The labor proposals aren’t really affordability policy at all. The PTO Act would mandate paid leave at one hour per 25 worked, up to 80 hours annually; the double-overtime proposal raises the overtime premium from 1.5x to 2x base pay. Both will benefit some workers. But mandated benefits and higher overtime costs make employing people more expensive. Employers will respond with some combination of higher prices, fewer hours, slowed hiring, lower wage growth, more automation, or less flexibility. You cannot make labor-intensive services cheaper by making labor more expensive.

The childcare proposal pushed by Rep. Ocasio-Cortez and Senator Warren is even more aggressive in raising labor costs. The Child Care for Every Community Act creates an uncapped entitlement whereby every covered child gets access to federally supported care, the federal government pays at least 90 percent of costs, low-income families pay nothing, and other families are capped at 1 to 7 percent of income. That lowers out-of-pocket costs for parents of eligible kids. But the bill also mandates national standards, richer services, facility rules, training requirements, and compensation comparable to public-school or military child-care pay. In other words: it raises the cost of supplying childcare, then hides the invoice by giving it to taxpayers.

The drug and housing supply ideas at least begin by acknowledging that supply matters. Yet even there, progressives reach instinctively for state capacity over market liberalization. The drug bill creates an HHS Office of Drug Manufacturing to produce select medicines and sell at a government-determined “fair price.” That may help reduce prices in some thin generic markets, at least if (and it’s a big if!) the nationalized producer is efficient. But why not first remove the barriers blocking private generic and biosimilar competition? Why not speed approvals, recognize drugs cleared by trusted foreign regulators, and attack genuine patent games?

Housing follows the same playbook. The ambition for building millions of homes is the one genuinely promising plank. If Congress helped states and localities legalize and accelerate construction where people want to live, that would be real affordability. But the proposed agenda also doubles down on demand-side subsidies like down payment assistance for first-time buyers and guaranteed rental assistance. In a housing market throttled by zoning, permitting delays, parking mandates, and local vetoes, more subsidies throw gasoline on the fire. It helps some homebuyers to bid more, but further drives up market prices for others.

As a national affordability agenda, this is a dud. It is not a plan to make America cheaper by liberating supply in core markets, let alone getting and keeping inflation low. It is a plan to make government bigger and to hide various bills via regulatory-grounded and tax-and-spend redistribution.

As our own Handbook on Affordability showed, there’s plenty of ideas for removing government barriers to supply or competition to lower prices or broaden options for households. At a time when most Americans are angry at the recent price level surge, redistributing high prices across other consumers and taxpayers is not only economically damaging, but also unlikely to ameliorate discontent.

The Federal Reserve has found another inflation spike it would rather not fight. The Iran war has pushed up energy prices, which has helped lift headline PCE inflation to 3.5 percent. Policymakers’ argument is that this is the rare inflation burst that really is transitory. It’s not too much nominal spending pushing up prices, but a one-time rise in the price level as expensive energy squeezes the economy’s capacity to produce.

In theory, this is defensible. The Fed can tighten monetary policy, slow total economy-wide spending, and offset some of the price pressure from higher energy costs. But it cannot conjure up more oil. Provided inflation expectations remain anchored, monetary policymakers have a reasonable case for looking past a temporary energy-price spike rather than squeezing the whole economy to counteract it.

Jerome Powell recently stated the standard case for keeping calm. “Energy shocks tend to come and go quickly,” he said, and “the tendency is to look through any type of supply shock.” A strict 2 percent inflation target during an oil shock would require suppressing nominal spending to offset a jump in energy’s price. The argument is that the Fed would be compounding the output fall: adding a demand squeeze to a supply squeeze, and so risking recession to prove its anti-inflation credentials.

This is the strongest case for advocating a nominal GDP target, or something close to it. Nominal spending equals prices times real output. If an adverse supply shock pushes real output below trend, targeting a stable nominal spending path may mean inflation drifts temporarily higher. That is not “letting inflation rip.” It is refusing to make monetary policy amplify the output reduction of a real shock.

The problem, however, is symmetry. If central bankers commit to look through negative supply shocks, they should also look through positive ones. Otherwise “flexible” inflation targeting becomes biased towards above-target inflation.

That is, if oil prices fall, productivity accelerates, or new AI technology makes firms more efficient, real output potential can rise faster than expected. Under the same “look-through” logic, inflation should then run lower, allowing consumers to reap the benefits of productivity through slower price growth.

Sadly, that is not how policymakers usually think about it. Nonfarm business productivity rose 2.2 percent in 2025, a much faster rate than almost the whole of the 2010s. Oil prices fell significantly last year too. Scott Sumner asks the obvious question: if policymakers really “look through” supply shocks that they have no control over, why did almost nobody call for inflation to run below target ? On the same logic used for oil price spikes, he wrote, it was “appropriate for inflation to run below 2% during 2025.”

The same asymmetry is also shaping the AI debate. Fed chair nominee Kevin Warsh has presented AI as a major positive supply shock, calling it “the most disruptive moment in modern economic history” and saying he was confident it would improve output. The White House agrees. Kevin Hassett says AI-induced productivity puts “downward pressure on inflation.” But both imply that this gives room for the Fed to loosen monetary policy, rather than the Fed “looking through” these developments over which it also has no control.

They may be right about AI’s growth dividend. But if stronger-than-expected productivity growth is a positive supply shock, the first-order lesson of the Fed’s Iran war stance is not that it gets “room” to ease and offset any disinflation. It is that inflation should be allowed to fall, provided nominal spending stays on track. In fact, when inflation is already above target, treating hoped-for productivity gains as permission to loosen monetary policy banks disinflation before it even arrives.

My worry is that there’s an obvious asymmetry developing here. Negative supply shocks? Look through the above-target inflation. Positive supply shocks? Ease policy to prevent below-target inflation. Heads, inflation overshoots. Tails, we still don’t go below target.

If this is how the Fed uses its discretion, it is instituting a clear inflation bias. The FOMC’s own framework affirms that long-run inflation is primarily determined by monetary policy and reaffirms a 2 percent PCE target. That does not require the Fed to react to every oil-price move. It does surely require symmetry for both signs on a supply shock.

The Fed has already erred in an inflationary direction recently. From 2021 onwards, it let talk of negative supply shocks obscure the more important fact that money was too loose and nominal spending then exploded. The public is still paying for this conceptual error through a permanently higher price level. A central bank that now tolerates overshoots from bad shocks while preventing undershoots from good shocks is not practicing flexible inflation targeting. It is building in yet higher inflation over time.

What can be done to keep inflation on target? A monetary policy rule, as Cato’s Handbook on Affordability suggests. Congress should bind the Fed to objective, transparent monetary rules and require public justification for any deviations. If we were to formalize something like a nominal GDP target, the Fed would then be bound to the look-through logic in both directions.

On the face of it, that discontent might seem unsurprising. The Iran conflict began in late February, and since then there have been worries that headline inflation this year could surge to 4 or 5 percent again, if a sustained oil price shock from a prolonged closure of the Strait of Hormuz rippled through the economy.

But this polling doesn’t look, primarily, like a backlash to the latest oil-price fears or the Iran conflict. The better reading is that Trump is suffering because voters are still angry about the earlier inflation surge and the fact that the price level never came back down.

In a Washington Post piece this week, I began to explain why in more detail:

1) Trump’s political deterioration on inflation began well before the Iran conflict. His net approval on handling inflation/prices fell steadily from his inauguration, from +6 approve-disapprove to a low of -34 late last year. There wasn’t an obvious breakpoint after Liberation Day or other policy announcements. There is a small deterioration after early February (-28) that likely reflects the Iran conflict, but most of the damage had already been done.

2) Trump is now as unpopular on inflation as Biden was at his lowest. Trump’s roughly -35 net approval on inflation now matches Biden’s low from May 2024. But CPI inflation today is about 3.3 percent, nowhere near the 9 percent peak Biden oversaw in June 2022. When the Economist/YouGov began tracking inflation approval in late 2022, CPI was still near 8 percent, yet approval fell as inflation moderated, bottoming out once it became clear that disinflation had stalled above 3 percent and the price level wasn’t coming down. That strongly suggests voters react to the price level rather than contemporary inflation rate, and that fact has endured over Trump’s presidency to date.

3) What they are reacting to is the legacy of the 2021–2025 price surge. The most plausible explanation is that voters are still furious about the higher price level left behind by recent inflation, and they blame Trump for failing to reverse it. This is less about current monthly inflation prints or policies (although on the margin, tariffs, pressuring the Fed to lower interest rates, the Iran war, etc. don’t help) than about the fact that everyday essentials still cost far more than they used to in 2021.

4) Trump helped create this expectation that he would bring prices down. Echelon Insights polling from December 2025 found that 80 percent of 2024 Trump voters expected him to deliver lower prices as president. That’s not surprising; Trump at least once pledged simply, “A vote for Trump means your groceries will be cheaper.” But lower inflation is not the same thing as lower prices, and was never in the President’s gift. In fact, prices are now rising more sharply.

5) That’s fueled disappointment, even among Republicans. In February 2025, Trump’s net approval was +65 among Republicans, -21 among independents, and -70 among Democrats. Now, those numbers have moved to +40, -51, and -95. Independent voters, an important bellwether, swung 30 points negative in just over a year.

6) And Trump’s own 2024 voters have soured too. Among 2024 Trump voters, his net approval on inflation has dropped dramatically from very strong positive territory (+67 in late February 2025, a month into his term) to just +33 today. Harris voters were already overwhelmingly negative, but now even many of Trump’s own supporters are registering disappointment.

7) Voters do not just want inflation to slow—they want prices to fall. The December 2025 Echelon poll found that 74 percent of Americans said only falling prices would convince them that inflation or the cost of living was no longer a problem. Slower inflation, 2 percent inflation, or even flat prices were not enough. As I’ve summarized of the poll before, 40 percent of Americans were even willing to endorse deflation after being told it would likely mean lower money wages. Only 15 percent of Americans thought deflation would be a bad thing.

8) That helps explain why Trump polls worse on inflation than on the economy overall. Trump’s approval for his overall handling of the economy (at -19) is somewhat stronger than his handling of inflation and prices (-35). That shows that, in aggregate, the public considers jobs and wage growth somewhat healthier than their evaluation of the state of inflation.

9) The inflation shock therefore seems to have rewired how Americans think about “inflation.” After a long period of relative price stability, the 2021–2025 surge has apparently made the public far more sensitive to the price level itself. Many Americans now use “inflation” to mean “prices are still too high,” not “prices are still rising rapidly.” Real earnings growth last year didn’t appear to dissipate concerns about affordability either. If real wages keep rising and time passes, history suggests eventually voters surely won’t care about the legacy of 2021-2025 on the price level. But right now they are highly attuned to it given its recency, and want a politician to bring prices down.

10) And that is why politicians end up waging a “war on prices.” The only way of achieving deflation, of course, would be a sharp monetary tightening that would risk recession. No policymaker wants that, nor to cut spending and government borrowing that might reduce long-run inflation risks. In fact, Trump has pushed for looser money and seems comfortable with big deficits. And so that’s why instead we get a “War on Prices.” Faced with anger about the effects of inflation on the price level, politicians of both parties are scrambling around proposing price controls, subsidies and various forms of regulation to try to reduce specific prices of life’s essentials.

Biden suffered politically for the inflation burst. Trump is suffering for not reversing its legacy. Unless politicians stop promising lower prices they cannot deliver, the next incumbent will suffer too. Cooling inflation is not the same as bringing prices down, and voters clearly have little patience for promising lower grocery bills if that outcome never materializes.

To read more on how policymakers could actually respond to Americans’ cost of living demands, see Cato’s Handbook on Affordability.

Republicans and Democrats alike are racing to develop policies to ease the “affordability crisis” ahead of the 2026 midterms. Inflation and cost-of-living concerns rank among the top concerns for American voters, and facing this huge discontent, policymakers at federal and state levels are under immense pressure to deliver price relief.

Cato’s Handbook on Affordability is a practical guide for how they might do so in an economically sensible way. It presents over 100 policy ideas that could help reduce the risk of inflation and lower prices or broaden options for cheaper basic core goods and services that people care about.

In my editor’s introduction, I’m direct about two things policymakers often get wrong where affordability is concerned.

First, today’s affordability frustration traces overwhelmingly to the post-pandemic inflation surge, itself driven by excessive macroeconomic stimulus. Congress flooded the economy with borrowed funds and the Fed allowed vast money creation. The resulting explosion in spending far outpaced the economy’s productive capacity, and prices jumped permanently. The “greedflation” narrative was only ever finger-pointing at corporations and landlords; “supply-shocks” can’t explain the breadth or permanence of the price surge. The real culprit was always Washington.

Second, most new proposals making the rounds – rent controls, interest rate caps, anti-gouging laws, government-run grocery stores, institutional investor home-buying bans, 50-year mortgages – don’t help improve affordability. Instead, they primarily shift the burden of paying for core life costs onto taxpayers, or create new shortages and distortions. They treat high prices as political problems to be band-aided over instead of price signals to be reckoned with earnestly.

Our handbook offers a different path:

1) Inflation: To reduce inflation and keep it low, we propose a range of reforms to the operation of monetary policy and specific institutional and policy steps to reduce federal budget deficits.

2) Core living costs: To ease the burden of paying for life’s basics, we propose removing government barriers that constrain supplies in eleven sectors comprising 75 percent of consumer spending: housing, energy, healthcare, transportation, childcare, food, clothing, higher education, and financial services.

The through-line is simple: A better approach to affordability is delivering sound money to protect against inflation and more economic freedom to supply goods and services.

A taster…

• On Orbán’s vision of government:

  Orbán had previously said during his time in opposition that we have only to win once, but then properly. But because if we win properly, then we will be in a position to be in charge —to rewrite the constitution— and that's what they did. He said explicitly that checks and balances have only meaning in countries like the United States, it's a US invention that for some reason of intellectual mediocrity European countries have adopted. He wanted complete power for parliament and the government that the parliament has elected. So he started doing this, and changing the system accordingly. Fidesz, his party got a two thirds majority, it made it possible for them to rush through a new constitution through parliament in a very short time without any consultation.

• On Hungary’s economic performance:

  economic growth in Hungary has actually been below average of post-communist EU countries. They used to be richer than Poland. The average Polish citizen is now 11% richer than the average Hungarian, and the Polish are as rich as the Japanese, while Hungary is lagging behind. Countries like Romania, Bulgaria, Croatia, they've grown faster than Hungary, so it doesn't seem to work, even though they've received some 4% of GDP annually in EU funds. So you have to start to wonder what, where did that money end up?

• On economic policy:

  We could call it crony capitalism, but I'm not even willing to call it capitalism because it assumes some sort of market exchange. But this is a system where economic success is dependent on proximity to power, and it's not just an unintended consequence of lots of EU money lying around or of post-communist or anything like that, this was an explicit project. Viktor Orbán said that early on that he thought that one of the mistakes of previous center right governments in Hungary was that they didn't build their own system of loyal capitalists.

• On efforts to boost fertility:

  Since 2021, the fertility rate has declined every year. So the latest estimate from the Hungarian Statistical Office is that it's back to 1.31, the fertility rate, one of the lowest in central and eastern Europe and births are now the lowest on record in Hungary. And this tells me that subsidizing births, even if you go to such lengths, 5.5% of GDP, it might give you an initial bump because people bring births forward in response to the subsidies, but it doesn't change the basic fact that they don't want more children over their lifetimes. So you just delay the decline in the fertility rate. So if even 5.5% of GDP annually does not have an effect on the fertility rate, it seems like there's something fundamentally wrong with this idea of subsidizing births.

“It’s basic supply and demand,” Elizabeth Warren said in a recent video as she and Alexandria Ocasio-Cortez revived their latest push for government-subsidized childcare.

Her argument was an example of what the late British economist David Henderson called “DIY Economics”: a “common sense” appeal to economic reasoning that falls apart when you think through its microeconomics.

In Warren’s account: Childcare is expensive because there are too few workers, too few workers because childcare pay is too low, and the fix is for the government to subsidize care, raise pay, and draw more workers into the industry.

But this blurs two very different ambitions: making childcare cheaper to deliver and making someone else pay for it. Warren’s Child Care for Every Community Act is built around a federal guarantee of “high-quality” care, capped family payments, and wages for childcare workers comparable to public school teachers. It is a financing plan, not an answer to making childcare prices lower.

Warren is right about one thing: childcare can be expensive. Child Care Aware says the national average annual price hit $13,128 in 2024, up 29 percent since 2020, outpacing general inflation. In 49 states and Washington, DC, center-based care for two children costs more than the median rent.

Warren and Ocasio-Cortez’s response is taxpayer-funded subsidies. Families below 75 percent of their state’s median income would be fully subsidized, and everyone else would have costs capped at 1–7 percent of income, based on a sliding scale. The pair of lawmakers says most families would pay no more than $10 a day as a result.

But their bill then also says childcare workers should receive wages and benefits comparable to those of similarly credentialed local public school teachers. That amounts to raising the underlying cost of delivering care before then transferring who pays that higher cost from parents to taxpayers.

Why is childcare expensive? It’s not an absence of government involvement. Primarily, it’s because childcare is a labor-intensive service overseeing something we care very much about. The St. Louis Fed reckons 60 to 70 percent of provider costs are wages and benefits. Combine that with the limit of how many kids most modern parents would tolerate a carer minding, and the “productivity” of childcare workers is relatively low. That explains why the median childcare worker earned only $15.41 an hour in May 2024.

The deeper force for why childcare seems to become more expensive over time is Baumol’s Cost Disease. As automation raises productivity and wages across other parts of the economy, childcare wage growth must keep up to retain workers. But since it’s difficult to automate childcare or squeeze out greater productivity, relative prices must climb to support rising wages. Add modern, high-income parents’ growing demand for high-quality childcare, and there are good reasons why childcare prices will be high, especially in high-wage major cities.

That is why Warren’s “worker shortage” explanation misses the mark. In an ordinary shortage, higher demand pushes up wages, higher wages attract more workers, and the quantity supplied rises. But the problem here is that the underlying service is costly, parents are only willing and able to pay so much, and labor is the biggest part of the cost. In a market like that, simply mandating higher wages cannot possibly make care cheaper, absent demand going up. One 2023 economics paper found that even a 10% increase in the minimum wage was associated with 4 to 8 percent higher center-based childcare prices, as providers passed much of the higher labor costs through to families.

What would actually lower prices? Deregulation, which I doubt Warren would embrace. In an open, pluralistic market, one could imagine all sorts of childcare arrangements at various price-quality bundles, ranging from intensive educational environments to care-sharing arrangements for cash between families. Increasingly, however, government regulations make any lower-cost options unfeasible. Stringent staff-to-child ratios and credential requirements, calibrated to the preferences of affluent parents, constrain supply for the poor in particular and push prices up for everyone. And other options—home daycares, nannies, au pairs, and cash-based sharing arrangements—face supply-restriction regulations too.

The best-known academic study on staff regulation for centers shows that stricter state regulations reduced the number of center-based establishments, especially in lower-income markets, while raising quality mainly in higher-income areas. Regulation to ensure “quality” creates winners and losers: more upscale care in some places and less care altogether in others.

Even the Center for American Progress concedes that some standards are “not directly tied” to child health and safety, can create unnecessary barriers for providers, and should be pared back; it also explicitly recommends removing zoning red tape and revising burdensome local restrictions on home-based care. When even progressives admit the rulebook is blocking supply, it probably is.

But there are other deregulations that would help. In Cato’s forthcoming Handbook on Affordability, my colleague Chelsea Follett details reforms beyond ratio relaxation and stripping away credentialism for childcare centers. Federal and state governments could relax the strict criteria for the au pair program, expand the scope of EB‑3 visas for childcare workers, allow nannies to opt for independent contractor status, remove facility mandates requiring a bunch of amenities, and make home-based childcare legal by right, overriding exclusionary zoning. All would increase the supply of childcare while putting downward pressure on market prices.

But Warren isn’t really interested in making childcare cheaper to deliver. She would instead take an already expensive, labor-intensive service, layer on public-school-style compensation and Head Start-style quality expectations, and hand the higher bill to taxpayers. It’s doing for childcare what the government has already done to healthcare.

The political sales pitch is “cheaper childcare.” The economic reality is “higher-cost childcare, financed differently.”

On why “national libertarianism” that tries to compromise with nationalists by accepting immigration and trade restrictions is an unstable equilibrium:

As is becoming increasingly apparent to people on the right, they cannot do the things they really want to do, stopping immigration and de-connecting the US economy or other economies from the world economy … without abandoning free markets. … You can't simply stop immigration large scale without having major controls over the domestic labor market. For one thing, you're going to have to spy on and severely punish and regulate employers to stop them employing migrant labor.

On why it’s dangerous to try to freeze the new right out of politics by deeming it “beyond the pale”:

The analogy I make is with the rise of socialism in the late 1930s 20th century, where you had this emergence of an organized working class movement and a lot of the established political elite at the time just refused to talk about and tried to use things like the anti-socialist laws in Germany to suppress it. And all that did was make the movement turn to even more radical forms of socialism, so instead of being Fabians they became communists, and the danger is that if you don't actually engage with these kind of politics, you are going to have something similar happen.

On how the realignment might affect near-term American politics:

I think there’s quite a reasonable possibility that for only the third time in its history, the United States will have four serious presidential candidates at the next election. … We could well see a very divisive primary season in both the Republican and Democratic parties[, and] then what you’ll have is a knockdown drag-out fight, see which ones come out on top. And I think on the Republican side, the right side, it will be the populists [over the conservatives], I’m afraid, because they’ve got the votes on that side. On the other side it’s up for grabs really, but I suspect the liberals will ultimately come out on top [over the progressives], but it’s a close call there.

On where libertarians should consider themselves in this political world where the big divide is nationalism vs. cosmopolitanism:

I think if you are a radical liberal you have to realize, in the world we are now in, or at least moving into but I think we’re in…you’re on the left… In many ways what has happened is that we are reverting back to the kind of politics we had in the 19th century, where the real division was between conservatives on the one side, liberals and radicals on the other.

Discuss.

Jared Bernstein, former chair of the Council of Economic Advisers under Joe Biden, has resurfaced with a new affordability wheeze: cap the price of groceries, with grocers compensated by price controls on credit card swipe fees.

Bernstein’s proposal, issued by the Center for American Progress (CAP), is to corral big grocery chains and their suppliers into a two-year “voluntary” price freeze on 24 staples — eggs, ground beef, canned tuna, milk, and the like — hoping that wages will “catch up” while the shock of high prices for shoppers after the recent inflation gradually fades.

Bernstein acknowledges that grocers might pass their revenue losses along to workers and suppliers. To guard against this, he recommends insulating grocers from loss and encouraging their participation in the price-cap plan, with promises of tariff relief and drastic reductions in the credit card swipe fees that grocers pay to Visa and Mastercard.

This price control one-two punch would yield an economic mess. Let’s start with food. Retail food prices give farmers, suppliers, and consumers crucial information about the relative scarcity of foodstuffs. When government forces prices down below market-clearing rates, buyers’ in-store demand will rise, while sellers’ incentives to offer the product will fall. Price caps stop prices from reflecting real-world scarcity.

The result is a gap between supply and demand, which materializes in empty shelves, fruitless consumer searches, rationing, purchase limits, and less variety. Some suppliers would reduce the quality or size of goods. When both buyers and sellers benefit from trading at a higher price, black markets emerge. Even if CAP’s ideas to protect grocers’ profits make grocers whole, they wouldn’t prevent many of these inefficiencies.

The history of food-price controls demonstrates these classic effects unambiguously. World War II price caps required consumers to limit consumption using ration books. When it became uneconomic to produce some foodstuffs at regulated prices, suppliers got around controls by reducing quality. Meat-packers “began filling sausages and hotdogs with soybeans, potatoes, or cracker meal.” Steaks were sold with extra bone weight. Shrinkflation and lower-quality packaging proliferated. Black markets were so extensive that Marshall Clinard of the Office of Price Administration questioned the “moral fiber of the American people.” In the 1970s, Nixon’s price ceilings led poultry farmers to destroy millions of chicks and dairy farmers to cull herds rather than invest in livestock at a loss.

The CAP plan would bind only those sellers that opt in, leaving prices for other sellers uncapped. The system would leak: Suppliers would steer goods to uncapped sellers. Producers would offer more uncapped brands and premium variants or sell them to uncapped outlets. And consumers faced with shortages of their favorite products would substitute premium variants or buy from an uncapped seller, driving the prices of these substitutes higher. Lots of distortions, in other words, for little or no net gain.

Grocery chains and food producers are not charities. Grocers will “volunteer” to sell below market prices only if incentives such as swipe-fee relief, tariff waivers, and Supplemental Nutrition Assistance Program (SNAP) incentives increase profits overall. Tariff relief is a good idea: CAP should have kept it at that. SNAP incentives benefit grocers at taxpayers’ expense. Swipe-fee relief pushes the costs of grocery caps onto the card issuers, who themselves will adjust by raising other fees and cutting benefits. Consumers would ultimately pay.

Merchants pay swipe fees, mostly “interchange fees,” to credit card networks each time a consumer uses a card. The CAP paper reports that those fees are “roughly 2 percent” per transaction and proposes cutting them by half, estimating this would offset the grocery caps by $4 billion–$6 billion. These numbers, apparently based on the average interchange fees paid by all merchants, are too high. Supermarkets, which negotiate from a strong position, pay lower interchange rates than average, usually well below 2 percent. This source, for example, pegs supermarket rates at 1.22 percent plus $0.05 per transaction for Visa and 1.48 percent plus $0.10 per transaction for Mastercard. Supermarkets enjoy additional discounts because they generate a large volume of low-risk transactions. Furthermore, Visa and Mastercard have recently settled a lawsuit that will reduce rates further. Reducing grocers’ rates beyond the discounts that they already get is hard to justify and will not yield the projected savings.

More importantly, savings to grocers from reduced interchange fees must come from somewhere. Card network pricing already balances merchant benefits (e.g., fraud prevention) with consumer benefits (e.g., rewards). If one type of fee revenue falls, other fees rise and benefits fall. When Australia and the UK capped credit card interchange fees, card issuers reduced rewards, increased interest rates, and raised annual fees. In the United States, the Durbin Amendment capped debit card interchange fees, costing consumers, by one study’s estimate, between $22 billion and $25 billion. Debit card issuers increased minimum balances and maintenance fees on checking accounts and reduced offerings of free checking accounts. Low-income consumers were disproportionately harmed.

The CAP proposal reduces interchange fees only for grocers, giving card networks the option of raising other merchants’ fees—which consumers would also pay. If card issuers could not adapt fees to make up their losses, it would devastate small banks, many of which earn much of their revenue from interchange fees.

CAP correctly anticipates that capping grocery prices would have disastrous side effects if grocers were not compensated. But the swipe-fee reduction cure would mean that credit card consumers would pay higher annual fees and enjoy less rewards, while grocery price caps would lead to shortages and harms. Both components of the proposed policy are destructive.

The consumer frustration driving this proposal is real. Grocery prices have risen 30 percent in six years, more than double the increase in the preceding decade. But recent increases are overwhelmingly the result of excessive monetary and fiscal stimulus—the “run the economy hot” policies that Bernstein supported—driving high inflation. To compound that error with “temporary” price controls would be misguided.

Market prices coordinate supply and demand and steer resources toward their highest value uses. We have not avoided food-price controls to protect grocery store profits but because price controls wreak havoc through the economy. If Congress wants to make groceries more affordable, it would be best to start by removing tariffs and other protections on food and agricultural inputs, which drive up the prices of sugar, milk, and other foodstuffs to begin with.

For the latest edition of Cato’s Free Society magazine, I interviewed John Mackey, Whole Foods’ founder and former CEO. In a wide-ranging discussion, we talked about why Whole Foods was successful, the idea of government-run grocery stores, the role of the CEO, the Make America Healthy Again movement, and the very nature of market competition. You can read the full write-up here.

I’ve also started solo-hosting Cato’s Thursday podcast. In the first two episodes , I discussed postliberalism with the Independent Institute’s Phil Magness:

And last week, I had Cato’s Adam Michel on to discuss all things tax, including the legacy of the One Big Beautiful Bill, no tax on tips or overtime, California’s billionaire tax proposal, and Trump Savings Accounts.

The economist Christopher Conlon has now offered a more formal treatment in a forthcoming paper in the International Journal of Industrial Organization. He comes to the same conclusions.

First, a reminder. What is the theory of “profit-led inflation” for the recent inflation surge? Per Conlon:

it is a version of the following: firms in a small number of upstream industries experienced shocks to costs (higher energy prices, higher shipping rates, lack of microchips for cars) and responded by raising prices in excess of their cost increases, leading to an increase in profits. Second, rather than (partially) absorbing the higher costs and reducing markups, downstream firms with market power sought to preserve their markups while constrained supply granted some firms a temporary monopoly over consumers, which they used to further raise markups. Later, others firms took advantage of the situation or used inflation as an excuse or pretextual cover to raise prices, increasing their margins (and profits) as well….

…Perhaps the novel feature of this “Profits-Inflation” narrative is not the focus on the exercise of market power, but the idea that inflation itself may serve as some sort of coordination mechanism. In an interview with CNBC, for example, FTC Chair Lina Khan said, “an inflationary environment can give cover to companies with market power or monopoly power to exploit that power.” In the “Seller’s Inflation” papers of Weber and Wasner (2023); Weber et al. (2024), “large cost shocks that hit all competitors can function as an implicit coordinating mechanism for firms, since firms know that their competitors face the same conditions and hence have strong incentives to raise prices.”

One problem with this is as a theory is that the outcomes it predicts for prices and profits are really no different from the alternative story that excessive monetary and fiscal stimulus drove up demand levels across the economy, pushing higher spending up against supply constraints.

In this textbook theory of excess money meeting a constrained supply, output rises, but so do prices and profits (temporarily). Why? Because when nominal spending surges into a world of limited short-run supply, buyers become less price sensitive. Firms don’t need a new “permission slip” to raise prices. They just face a demand curve that has shifted up, and they move prices up to match.

So if “profit-led inflation” is just a colourful way of saying “in a hot economy with surging spending and constrained supply, firms with some market power will raise prices and margins,” then: yes, that’s true. But trivially so.

Yet that is not the spirit of the narrative that profit-led inflation theorists were pushing. Their stronger claim implied that cost increases themselves changed industries’ competitive conduct—i.e. that it created conditions that moved firms from more competitive to more cooperative equilibria—so prices and profits could rise without a corresponding increase in demand. Cost increases, in other words, greased the wheels for tacit or implicit collusion to raise prices aggressively.

Indeed, the theory’s proponents made clear that they were making a causal claim about inflation, not a descriptive one. This is most obvious in policy terms, where profit-led inflation advocates typically downplayed or opposed the need for monetary tightening to choke off inflation. Instead, they recommended going after firm profitability directly via “expanded antitrust enforcement, laws preventing, ‘price gouging,’ a tax on ‘excess’ or ‘windfall’ profits, and price caps.” They saw inflation, in other words, as being borne of undesirable microeconomic firm decisions, not macroeconomic policies.

Conlon’s Theoretical Insights

This is where Conlon’s industrial organization economics is useful, because it forces you to say what would be different in the data if the profit-led inflation story were true.

If we set aside firms setting prices expecting future changes in conditions, Conlon uses microeconomic theory to show that there are essentially three reasons a profit-maximizing firm raises prices:

(1) demand increases—consumers become less price sensitive;

(2) marginal costs increase—input costs rise or supply constraints bite;

(3) conduct or the nature of competition changes, at least temporarily.

But these different reasons have different implications for price, output and industry profits, as his Table 1 shows.

Take the cost shock thesis. Greedflationists say that costs rose; firms raised prices more than costs; profits rose; and this is supposed to be evidence of “cost-push profiteering.” But under standard models, a pure industry-wide cost shock does not raise industry profits. Indeed, if higher costs by themselves reliably raised profits, Conlon says, firms would lobby for excise taxes on their own industry. They typically do not.

Testing the stronger claim about profit-led inflation thus really requires differentiating between the remaining demand story and the competition/conduct story. At a macroeconomic level, real output growth was strong during the period where prices surged, providing evidence that this was a demand-led story.

Theoretically, there are ways you could try to distinguish causes at the microeconomic level too. ou need industry-level data where you (a) estimate demand elasticities, (b) measure or credibly proxy marginal costs, and then (c) to test whether pricing behaviour fits a more competitive model or a more cooperative one in different periods.

Even then, identification is hard. Conlon warns against treating “conduct” as a free parameter to estimate because simultaneous cost increases can look like a simultaneous softening of competition, given this also raises prices and lowers output. The practical way forward is testing models using moment conditions and, crucially, instruments: you need variables that shift demand (or “rotate marginal revenue”) but not marginal costs. When you have those tools, it is in principle possible to separate supply from demand and select a model of firm conduct.

That is what the strong claim commits you to show. You need a demonstrable break in conduct around 2021–22 across a wide swathe of industries, strong enough to move the aggregate price level, and not explainable by demand or cost changes. But greedflationists haven’t done that sort of work.

The evidence greedflationists have provided…

Now compare that standard of evidence to the evidence the greedflation proponents have actually offered. Conlon reviews their papers comprehensively, and the results are not flattering. To summarize, they have taken as evidence:

1. Periods where CPI was growing quicker than the Producer Price Index, implying that the difference is higher profit. Yet this is based on a misconception that the PPI is an index of input costs, when it actually measures prices received by producers “from the perspective of the seller.” Differences between those two price indices largely occurs because their baskets and weights are wildly different. The differential doesn’t track profitability. Even PPI sub-indices that do track the price of intermediate goods aren’t synonymous with production costs either, because they don’t include other inputs like labour, energy and transportation.

2. “Profits caused 50+% of inflation” national accounts decompositions. These papers break down “value added” into labor, non-labor costs, and “profits,” treating the identity like a causal equation to then claim profits going up can explain most of the price rise in specific periods. But these studies don’t illuminate the underlying causes of changes to these factor shares, and tend to be cherry-picked to short periods where the result holds to avoid longer periods where it looks like workers’ wages are “driving” inflation.

3. Markup and margin charts. Yes, some industries show rising markups during the recent inflation. But rising markups and rising prices are consistent with both increased demand or more collusion; that’s exactly the identification problem. Add to this that markup measurement is messy in practice, that firms are hard to assign to a single “industry,” accounting measures don’t map cleanly to marginal cost, and the timing often doesn’t line up neatly with popular narratives, and you’re left with weak suggestive evidence.

4. Earnings calls: “pricing power” as smoking gun. Again, announcements of price increases “in excess of cost increases” on earnings calls do not distinguish between “strong demand” from “changes in conduct” as the underlying cause. And several of the precise quotes held up seem to either just reflect executives preferring industry-wide cost shocks to firm specific ones, or confirm that they think demand has shifted. Proctor and Gamble’s CFO, for example, said the firm raised prices because consumers showed a “lower reaction…in terms of price elasticity than what we would have seen in the past.” That is not a confession of collusion or using cost increases as an excuse. It is telling you a demand change was the underlying driver!

The bottom line

If “profit-led” inflation means that strong demand in a supply-constrained economy produced temporarily higher profits in some sectors, then that’s true. But if it means inflation was driven primarily by a widespread shift to more cooperative or tacitly colluding conduct—prices and profits rising without demand—then it is a bold hypothesis that certainly hasn’t been tested, let alone proven.

Conlon is doing yeoman’s work, treating this with an economic seriousness it really doesn’t deserve. But even he is mainly just considering the microeconomic side. Even if there were some tacit collusion or a weakening of competitive conduct in some industries, that should only really be a big enough effect to alter relative prices, not the aggregate price level.

And that’s what I keep coming back to. You can’t have a sustained, broad-based rise in the overall price level unless households and firms are able to pay those higher prices. Where does that ability come from? Higher nominal spending! In which case, we are right back to surging demand from excessive stimulus being the cause of the inflation.