T he Commission for Fair Trading overturned an order, issued last December by the Office of Fair Trading (OFT), stopping Federated Mills plc from raising the price of flour to bakers. The OFT had argued that Federated Mills had taken advantage of its position as the leading supplier of wheat in the country, deeming the increase unjustified. The company took its case to the commission contending that the price of wheat on the international market had been rising and that this was completely outside its powers to control.

With hindsight, a number of issues about this case are now clear - not least the worldwide hike in wheat prices. It is also transparently clear that the OFT's rejection of Federated Mills' entirely justifiable application was driven not by any suspicion of alleged abuse by the company but by domestic political considerations in the run-up to a general election, which everybody knew was imminent. The government was concerned that a bread price rise at that point could have had adverse electoral consequences for it. What happened just days ago confirms this.

While the government's was an understandable political consideration, it is not one which an Office of Fair Trading, whose ostensible purpose is the protection of the consumer, should have condoned or colluded at. Nevertheless, the objective of heading off possible political embarrassment has been achieved. It was a cynical decision and the OFT and the then minister responsible should feel suitably chastised by the commission's revocation of the earlier ruling.

The commission's ruling in this episode exposes wider issues about government subsidies, competition and fair trade. The first concerns the position of the OFT itself. This case has shown that - as the government has already been urged - it would be best for the department responsible for fair competition to be independent of the government of the day, and properly manned and equipped, in order to be able to do full justice to the needs of the consumer. The OFT should not be subject to official direction by government ministers if conflicts of interest of this kind are to be avoided.

As to the issue of subsidies to consumers, it was argued by the company in this case that the government should have intervened, as had happened on previous occasions, by increasing the subsidy for wheat to bakers in order to cushion the price rise to customers. But to argue thus is short-sighted. In a free market, government subsidies simply distort competition, lead to artificially low prices and consequent waste. This is the situation not only with bread but also with two other important elements of modern life: Water and energy. All are subsidised by government - in the case of water the true price is some three or four times what the consumer pays. In all cases, consumers are careless in their use (though the energy surcharge has tended to dampen demand) leading to waste and inefficiency.

There are other ways of ensuring that those in society who are vulnerable and in need of financial help are given it without the need for market-distorting and expensive subsidies to be given to everybody.