It doesn’t make sense to me. I used to be all like but then everything increases in price still Yada yada. But recently… why can’t we just lower the prices of petrol artificially. Why can’t we just lower housing prices by law?? Why can’t we erase inflation seeing as it’s completely made up anyway.
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Here’s something I posted recently on the problems with governments fixing prices.
Governments can and do sometimes fix the prices of goods. For example, in the UK there is a price cap on domestic energy. This kind of thing is more common in markets where competition is limited for some reason. However there are odd examples around the place – if I remember rightly the price of a baguette in France used to be limited, and maybe the price of an espresso in Italy.
However fixing prices comes with a bunch of problems. Some examples:
* the price might be less than the cost of producing something, in which case companies are likely to stop providing it. So you end up with a shortage of supply. Or quality might be cut to reduce costs. (Or you end up trying to control the price of everything in your economy, including labour.) If the UK fixed a price for oil, why would international oil companies sell here when they can sell somewhere else at a higher price? (The government would have to *subsidise* oil – putting tax money towards paying for it, which is another kettle of fish.)
* where there are lots of sellers it’s hard to enforce price controls. (If combined with shortages of supply this is likely to lead to a black market.) There’s likely to be a lot of bureaucracy – eg. dividing products into categories each with their own price, then monitoring these prices in the market – and lots of opportunities to exploit this bureaucracy.
* increased prices should work as a signal for more producers to enter the market and for more investment, increasing supply and potentially lowering prices again.
* fixing prices of certain goods will put people off switching to alternatives – for example, holding down the price of domestic fuel makes improving energy efficiency less attractive.
And that’s all for *specific* goods – for example, if controlling the price of domestic energy. Inflation is a *general* increase in prices across the economy, so a government would have to control the prices of a huge number of things, and this makes the problems massively worse. The ability for sellers to increase prices is essential for a market economy to function properly.
Trying to fix the level of prices generally is something countries with this kind of economy do only in extreme situations, like wartime (and even here they’ll generally use other measures).
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