Downing Street is drawing up plans for retailers to introduce price caps on basic food items such as bread and milk to help tackle the rising cost of living, The Telegraph can disclose.
Rishi Sunak’s aides have started work on a deal with supermarkets akin to an agreement in France in which the country’s major retailers charge the “lowest possible amount” for some essential food products.
The move would amount to the biggest attempt to manage supermarket prices since controls established by Edward Heath in 1973. However, No 10 insists that any action by retailers would be voluntary.
It comes amid growing concern in government about sustained pressure on household finances from inflation and the rising cost of borrowing.
A Treasury source said: “Food inflation is much more resilient and difficult to get rid of than we anticipated.”
The Telegraph can also disclose that continued inflation and increases in gilt yields are throwing into doubt Mr Sunak’s aspiration to cut personal taxes before the next general election.
Official data published last week showed core inflation in the UK economy, which strips out volatile food and energy prices, increased to 6.8 per cent in April, its highest level in 31 years.
Ten-year gilt yields are at 4.33 per cent, having peaked at 4.54 per cent, following Liz Truss’s mini-Budget.
A government source repeated Mr Sunak and Jeremy Hunt’s mantra that “we need to address high inflation and high borrowing first” before cutting taxes. A Cabinet source added: “If you haven’t got growth you haven’t got the money [for tax cuts], it’s as simple as that.”
A minister said that tax cuts were now highly unlikely until next spring at the earliest.
The Prime Minister is thought to be preparing to address the state of the economy in public remarks this week, as officials prepare fresh advice on how long high inflation is likely to persist.
The proposal for a French-style agreement on food price caps has been quietly discussed within Whitehall and among industry figures in the last fortnight.
In France, the supermarkets that signed up to the deal with the government each identified items in their own shops that would be subject to price freezes or reductions. In many cases own-brand items were selected on the basis that retailers found it easiest to control their costs.
But one source briefed on the plan warned that it would be “anti-market” and could harm smaller retailers who would lose business to the supermarkets offering cut-price items.
The source added: “It’s very easy to point the finger at retailers and say they are making a fortune, but some of the margins they are operating at are not that big. It is quite tight.”
A No 10 source said that the proposals were at a “drawing board” stage.
The source said that there was a recognition that supermarkets were “not operating on big profit margins”, but added: “The pressures are such that we are working with retailers on anything that can be done at their end to bring down prices for consumers.” Talks with retailers were at “early stages”.
The French government’s deal with retailers was announced in March, when Bruno Le Maire, the finance minister, said that a deal in which retail groups had agreed to cut prices would turn the period between April and June into an “anti-inflation quarter”.
Earlier this month, Mr Le Maire said the initiative was being extended for another quarter, with food inflation running at a record 15 per cent. He later threatened to raise taxes on retailers “to recover profits unfairly made on the back of consumers” if they refused to lower prices further.
Last week it emerged that UK inflation had fallen by less than expected in April, with consumer prices increasing by 8.7 per cent in annual terms, down from 10.1 per cent in March.
Britain has the joint highest rate of inflation among the G7, alongside Italy. On Saturday, three former Bank of England rate-setters warned that interest rates, which increased to 4.5 per cent earlier this month, will need to rise as high as 6 per cent to stamp out inflation.
Separately, UK bond yields have returned to the levels that contributed to the departure of Ms Truss as prime minister in October, as traders bet on more rate hikes by the Bank in order to get inflation under control.
Since his campaign to become Conservative leader, Mr Sunak has insisted that he wants to cut taxes but only once he has succeeded in reducing inflation and getting borrowing under control.
The approach marked a dividing line with the strategy of Ms Truss, who said that tax cuts were needed immediately to help grow the economy.
Now, the economic outlook is leading Mr Sunak’s advisers to question whether he and Mr Hunt can afford to implement personal tax cuts ahead of an expected election next year, in the absence of a dramatic improvement.
Last week Mr Hunt said he was comfortable with Britain falling into recession if it resulted in lower inflation.
One minister said: “All the Tory Party want tax cuts… it’s in our DNA. I just want them at the right time.
“We just need to get our house in order first. We’re going to wait for the Budget next year. ”