Price Controls and Inflation

by Don Boudreaux on May 3, 2006

in Prices

Reviewing Richard Parker’s biography of John Kenneth Galbraith, Robert Skidelsky says the following about the price controls that Galbraith was instrumental in implementing during World War II:

Price controls were a success, the consumer price index barely budging in the war years [p. 147].

(Skidelsky’s review appears in the March 2006 issue of the Journal of Economic Literature.)

Skidelsky is correct only if one defines inflation as a change in the price level, and only if one measures the effectiveness of price controls by how well they prevent the price level from changing.

I hold no special affection for returning to (what I believe to have been) the older definition of inflation as being an increase in the money supply.  Despite seeing a great deal of merit in this older definition, I wouldn’t go to the mat in opposition to defining inflation as an increase in the price level.  But there is a problem with this way of defining inflation — namely, it allows people to suppose that price controls really control inflation.

Inflation might better be defined as a loss of purchasing power of the currency unit, "usually expressed as a general rise in the prices of goods and services" (see here).

Clearly, price controls do not prevent the value of the currency unit from falling.  Yet when someone reads such a statement as the one quoted above from Skidelsky, one might carelessly conclude that price controls are indeed a useful tool for controlling inflation.

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