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Are Price Controls the Answer to Our Raging Inflation?

Most economists say no, as the controls can end up causing shortages. Wage and price controls didn't work in the 1970s.
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The surge in inflation has led a few economists to raise the idea of price controls, which haven’t been imposed since Richard Nixon’s wage and price freeze of the 1970s.

That experiment didn’t work out too well, notes The New York Times in a story about the latest price-control talk.

Initially, after Nixon acted, things looked good. Inflation dropped to below 3% in 1972 from more than 6% in 1970. But prices sprang back almost immediately after Nixon dropped the restriction. So he tried again, and that didn’t work either.

Price Controls Have an Inherent Problem

Economists point out that the natural incentive for consumers under price controls is to buy, as prices can’t go up, The Times reports. But the natural incentive for businesses is to slow production, because of the limits on how much they can charge for their products. All this adds up to shortages.

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Some economists say price controls can work for isolated products in isolated situations, such as on essential goods after natural disasters, The Times reports. But most economists say they don’t work in fighting widespread inflation like we face now.

The Fed Fights Inflation

Given the broad consensus against price controls, it looks like we’ll be relying on the Federal Reserve to quash inflation. Fed officials offered a median forecast of three rate hikes this year at their meeting last month.

But many analysts and investors anticipate four, especially after this week’s news that consumer prices soared 7% last year. Consensus is building that the rate increases will begin in March. The CME Fed Watch Tool shows federal funds traders see an 86% likelihood for a move then.