Food producers are keeping prices high, says Andrew Bailey

Andrew Bailey has suggested that high supermarket prices are being driven by food producers “rebuilding” their profits, as the Bank of England admitted its models had failed to predict a surge in inflation.

Mr Bailey, the Governor of the Bank, said that manufacturers are not passing on falls in the cost of raw materials following a peak last summer.

This meant that prices had not fallen as fast as the Bank expected, he added, with food inflation surging to a fresh high of 19.1pc in March.

It came as food makers were hauled into the Treasury for a meeting with the Chancellor Jeremy Hunt to discuss why prices remained so high.

Speaking to MPs on the Treasury Select Committee, Mr Bailey said: “Our agents are starting to pick up a story about margins … it’s a story about rebuilding margins that were squeezed particularly last year.”

He added that this was not the same as profiteering.

Mr Bailey also admitted that the Bank had “very big lessons to learn” following its failure to keep inflation under control.

His comments followed the Bank’s latest Monetary Policy Report, which included the biggest revision to its GDP forecasts in the Bank’s history.

Mr Bailey admitted at the time that it had underestimated the strength of the economy, and the Bank highlighted problems with its modelling, which is based on the last 30 years of data - a period in which there was no comparable inflationary shock.

Mr Bailey made the same point again to MPs, saying that Threadneedle Street failed to anticipate the extent to which food producers were forced to keep prices higher for longer because they had agreed contracts - such as energy deals - in advance when their costs were larger.

He said: “It should have been possible to identify that.”

Separately, food manufacturers were called to a meeting with the Chancellor to explain why shoppers are still facing eye-watering prices at the tills. 

Tensions have been mounting between grocery chiefs and their suppliers over the lack of widespread price cuts.

Supermarket bosses were earlier this month summoned to meet the Government amid claims of profiteering, which they deny.

John Allan, then chairman of Tesco, suggested earlier this year that some suppliers might be taking advantage of inflation to push through steeper price increases. 

However, major food makers have rejected those claims, and on Tuesday are understood to have told the Chancellor that they were swallowing the majority of cost increases and not passing them on to supermarkets.

Food and drink chiefs urged ministers to pause incoming regulation in areas such as recycling, which is expected to add extra costs into their business.

The Treasury said it had agreed to further discussions between food bosses and senior ministers over “potential measures that government and industry can take to ease the pressure on consumers”.

Separate figures from Kantar suggested that shoppers were still spending significantly more on weekly staples including milk and eggs, despite recent attempts by supermarkets to rein in costs. 

Grocery prices jumped 17.2pc in the 12 weeks to May 14 - the third fastest rate of inflation since 2008.

Grocers have pointed to recent price cuts as a sign that they are taking steps to push through reductions to customers as soon as they see them from their own suppliers.

The average price of four pints of milk is down by around 8p over the past month, according to Kantar’s figures, following moves by all the major supermarkets to lower their prices in response to falling wholesale prices. However, this is up 30p versus where it was last year.

Fraser McKevitt, of Kantar, said: “Retailers know just how important it is to offer even small savings on staple products like milk to get customers through the door.”

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