Keywords

inflation, price controls, availability, substitution

In this paper, we analyze the effects of a price control program designed to mitigate the inflation burden for households. In particular, as a part of a larger relief package, in September 2022 the Croatian government lowered and fixed the price of essential food products, including long-term milk. While selective price controls on food products have a social dimension, setting the price ceiling too low might lead to shortages and a decrease in consumer welfare. Applying a difference-in-difference identification strategy and using weekly data on milk availability and pricing across a number of stores in Croatia, Slovenia, and Bosnia and Herzegovina, we estimate the causal effects of the price-ceiling policy. We find that the regulated milk was around 35% cheaper than it would have been if there was no program, and we find no adverse effect on the regulated milk availability. We document that the price of substitutes (other types of milk) did not increase, but we do record an increase in the availability of close substitutes of the regulated milk type. While our back-of-the-envelope calculation indicates that the effect of milk price ceilings on overall inflation is negligible, we show that this inflation-soothing effect is more prominent for poorer households.