Who is actually putting up prices?

John Healey, the new Chancellor of the Exchequer, says he will be watching closely for evidence that customers are being taken for a ride at the pump and at the till. This was translated in a headline on LBC to “Healey vows to clamp down on supermarket price gouging caused by the Iran war”. Not satisfied with this, Mr Healey added in an op-ed in the Telegraph that not only was he planning to give people hope but to also make Britain more resilient to the type of shock that has followed the war in the Persian Gulf.

The TelegraphHealey: I will not allow supermarkets to rip you offChancellor warns of more cost-of-living pain because of Iran war but promises to be hands on to protect the public.

This is the sort of hubristic, hypocritical nonsense that has become a regular feature of modern British politics. Maybe it was always so, but the volume of this sort of stuff has undoubtedly increased significantly in the last two weeks. To put this politically motivated twaddle into perspective, I thought it would be helpful to present the facts.

Food

Let's start with food. Food prices have fallen year to date, in absolute terms. The supermarkets have spent the year cutting prices into a relatively weak consumer backdrop, competing hard on promotions to get people through the door. The effect shows up in the official numbers. Food is making its smallest contribution to headline inflation in nearly two years.

Although food prices may tick up towards the end of the year, in the very short term food price inflation may fall even further due to base effects, and yet this is the sector the Chancellor has chosen to put on notice for price gouging.

Fuel

What about fuel? The cheapest fuel in Britain is sold on supermarket forecourts, and has been for years. In fact, the major fuel retailers price off them. Not surprisingly, the largest single component of what a driver hands over at the pump is not the retailer's margin; it is tax.

ICAEWChart of the week: fuel pricesOur chart this week is on fuel prices, illustrating both how the price at the pump is made up and how prices have risen over the last four months.

On a litre of petrol at just under 160p, fuel and environmental duties account for around 34% and VAT a further 17%, so tax takes just over half the pump price. The fuel itself accounts for about 39%, and retail and distribution costs together for around 10%.

Although the fuel retail industry has traditionally operated with margins around mid single digits, the supermarket groups have historically operated with much lower margins in fuel, often using fuel as a loss leader. And yet, again, it is this sector that the Chancellor has put on notice for price gouging.

Resilience

As for the third point, making Britain more resilient in the face of energy price shocks, this arguably is the most egregious example of the Chancellor's rank hypocrisy. Quite how this government's energy policy, championed by the last Secretary of State and by the new incumbent, could be seen in any way as compatible with helping to make Britain more resilient in the face of energy price shocks is totally beyond me.

On the contrary, its energy policies, which have imposed ludicrous levels of taxation on companies operating in the North Sea, banned new drilling and fracking and described fossil fuel extraction in the North Sea as climate vandalism, have made the economy more, not less, vulnerable to energy shocks.

This self-harming policy now means that the UK has to import vast amounts of oil and gas from countries like Norway, which is drilling for these precious resources in the very same basin which UK companies are prevented from exploiting. Then of course on top of this lunacy is the fact that UK industry faces the highest electricity prices of any IEA member country, as a result of bloated government-imposed subsidies paid to renewable energy developers and the costs of connecting that remote infrastructure to the grid.

Summary

My advice to Mr Healey would be to remove the vast plank from his eyes before advising British supermarkets to remove the splinter from theirs.

In summary, it is this government's policies and its predecessors' which have created this vulnerability to energy shocks. It is this government's daft fiscal policies and its incontinent spending habits that have helped to drive inflation up.

Food retailers appear to be doing their bit to keep it down right now, and they should be praised for doing so, not falsely accused of price gouging.