There is a definite whiff of “something must be done” in the air. UK supermarkets were last week discussing food prices with the Treasury. This week came a Downing Street summit on the food industry and the launch of a “farm to fork” parliamentary inquiry. 

Sir Ed Davey, leader of the Liberal Democrats, had called for the competition authorities to look into “profiteering” by supermarkets. And lo, the Competition and Markets Authority said this week that it would scrutinise supermarket fuel pricing and the groceries market more closely

This isn’t surprising in one sense. Food inflation reached 19 per cent in March, with staples such as cheese and milk up far more. Consumer group Which? found the highest inflation at discounters Lidl and Aldi, and on cheaper own-brand lines compared with branded products. The Resolution Foundation says that food is overtaking energy as the primary pressure on living standards. The think-tank found 61 per cent of the poorest households are cutting back on food and other essentials, compared with 35 per cent in the richest fifth. 

This is a crisis that deserves attention. But making the supermarkets the focus of concerns about so-called greedflation, where businesses capitalise on inflation to bolster their own profitability, is unhelpful. 

The competition watchdog singled out fuel for attention, noting increasing profit margins and “evidence from internal documents” that at least one supermarket had increased its profitability targets. 

You don’t say. It’s a fair bet that the supermarket is Asda (which declined to confirm). The CMA noted Asda’s “aggressive road fuel pricing strategy”, both in blessing its takeover by private equity group TDR Capital and in blocking its merger with J Sainsbury in 2019. A strategy shift was a known risk of the deal.

However, Asda says it remains “the price leader” on fuel. And supermarket prices are still 3.5p a litre cheaper than the UK average, according to the AA, compared with 4.5p a litre in April 2019. 

The truth is that fuel has become less important for all supermarkets as a way of attracting customers. In the “price match” era, money made on fuel has likely been used to keep food competitive. And the gap between the biggest four supermarkets’ pricing on 30 key grocery items and the discounters (who don’t have forecourts) is roughly a third of its 2014 level, according to Exane.

There wasn’t much sign of profiteering in recent results. Both Sainsbury’s and Tesco said profit fell in the last financial year, as sales growth failed to keep pace with inflation. The sector operates on profit margins of about 3 per cent, compared with the consumer groups that supply branded products in the mid-teens. Over the past five years, notes Andrew Gwynn at Exane, the average European grocery operating margin has fallen 60 basis points, while the US average has risen by 100.

The products experiencing the highest price rises largely make sense (and the CMA recognised that “global factors” were the main culprit). Products such as dairy and eggs have shorter supply chains so reflect higher input costs more quickly, says Kien Tan at PwC. Ingredients are a bigger chunk of the price of own-label products than branded alternatives. 

Meanwhile, the bigger picture is that the share of UK household budgets going on food has fallen from a third in 1950 to about 10 per cent, low by international standards. Four pints of milk cost between £1.55 and £1.60 a decade ago, says Clive Black at Shore Capital, falling to £1.09 pre-pandemic. The supermarkets have just cut prices back to £1.55 after they had shot up to £1.65. Shortages of tomatoes and salad items earlier this year were partly down to producers preferring other markets over the cut-throat UK sector. 

This week’s summit in Downing Street was focused on developing a sustainable, resilient food supply chain and more domestic production, implying higher food prices to support it. The UK is managing to discuss — in the same week — whether supermarket prices are egregiously high or problematically low, without really addressing the contradiction. Making the supermarkets the bogeymen of food inflation won’t help tackle that question.

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