Price Controls Will not Control Inflation

From the Economic Observer, a Chinese official publication:

On January 16th, Chinese government started up temporary price control measures in order to prevent rapid price increases and maintain a “normal and stable” price system. It is obvious that the government attaches great importance to price rise situations, and this reflect its resolve to restrain inflation.

Over the past few months, any business that increased its prices was invariably criticized. Government departments, on the pretext of maintaining price stability, forced such businesses to halt their price increases. On the surface, such a measure does help to maintain the market price so that the civilians won’t pay much higher living cost. However, if deeply analyzed, those measures may have the opposite effect.

In the competitive market, as material costs continue to increase, they must either increase the sale price or else reduce output in order to cut down their losses. In response to the administrative measures, businesses will probably reduce their output, which is bound to lead to even more serious conflicts between supply and demand– and further price rises. This is probably not what policy-makers want.

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