Executive Summary

Prices for key household goods rose at an accelerated rate in 2008, especially prices for food and fuel, and consumers have noticed the effects on their families’ budgets. Some studies suggest that women perceive the problem of rising prices to be more severe than do men.

The Consumer Price Index shows that the price of gasoline rose by about 30 percent in 2007, compared to about 35 percent in the first half of 2008. The food index increased by about 5 percent in 2007, with a cumulative increase of almost 8 percent from 2007 to mid-2008. Natural gas rose at an astonishing 73 percent between 2007 and 2008, compared to a slight decline in 2007. There are signs that the increases have slowed by the fall of 2008. But prices for education and health care services, such as insurance, continue to climb as part of a longer-term trend.

Some people have reacted to these rising prices by crying foul. For example, when hurricanes struck hard in some states, some gas stations raised prices over $4.00 a gallon and many accused them of “price gouging.” They want government to take an expanded role in monitoring how prices are set, and some have even proposed measures that give government a role in actually determining prices, or imposing price controls.

Are price controls the answer? Economists universally warn that these regimes cause worse problems than they solve, typically leading to severe shortages. But somehow the idea retains its appeal even among the relatively sophisticated. One well-educated young woman I lunched with recently thought the United States should impose price controls on medicines, reasoning that we are the only country that doesn’t have them. Several states have prosecuted retailers under state laws concerning “price gouging.” And some legislators tried to demonstrate their solidarity with the men and women of America by proposing the Federal Price Gouging Protection Act of 2008, which would have punished “unconscionable” price increases with fines up to $150 million for corporations and $2 million for individuals, or up to ten years in jail time. Ultimately, the bill failed to pass. But why is there so much support for an unsuccessful policy? Maybe people think that though price controls have not worked in the past, the situation now is different.

But price controls are a bad idea even now. While the economy is more complicated than it used to be, basic economic principles still operate, even in emergencies. This paper explains how price controls affect the economy, and why they are harmful. The next section looks more closely at “price gouging” and the role prices play in crisis situations. Price controls lead to problems for producers and consumers alike, and do nothing to fix the underlying factors that cause prices to rise in the first place. The best solution to rising prices is to wait for markets to secure supply and/or reduce demand, and high prices encourage both.

Consistent with this, gas prices in the fall of 2008 are falling steadily as world demand drops and hurricane season ends, ending supply disruptions.