Supermarkets have denied profiteering from a period of unprecedented food inflation despite passing on £200m more to consumers in price increases since 2005 than they inherited from suppliers.

A new study, published exclusively in The Grocer, reveals that a 14% increase in commodity prices between 2005 and 2007 cost the UK's top 150 manufacturers an extra £4.3bn. After absorbing £0.8bn of that cost and seeing average margins drop 1.2% as a result, suppliers passed on £3.5bn of price increases to retailers. But as The Grocer/OC&C top 150 survey reveals, retailers passed £3.7bn of price increases on to shoppers, gaining an extra £200m and pushing their own margins up from 4.4% to 4.5%.

The revelation comes as supermarkets teeter on the brink of a price war that threatens to escalate. Asda recently sold 11 of its most popular food items for 50p each, while in a Sainsbury's campaign Jamie Oliver showed how to cook a family meal for under £5. Tesco claims it has spent £400m this year on reducing prices to help customers.

Despite heavy promotional activity, the supermarkets had insulated themselves from commodity inflation very effectively, said OC&C associate director Will Hayllar, co-author of the report. "Supermarkets are very sophisticated about how they juggle prices from aisle to aisle," he said. "They also know that consumers understand they are going to pay higher prices for goods because they're following price increase stories in the press. So it is easy in the current climate to slip a few pence on to various goods where it can help maintain margins without shoppers raising eyebrows."

The supermarkets refuted accusations of profiteering from the economic gloom, however. Morrisons CEO Marc Bolland said: "Our input costs have risen stronger than retail inflation. The improvement in margin over the past year is due to cost-cutting and extra sales. We've cut logistical costs by 10%. At the same time, as you've seen, we've cut prices repeatedly."

The latest initiative saw 2,000 prices cut in June, with 2,000 more in July.

Another retail source defended the margins of multiples. "I don't know of any other industry that gets by on the sub-5% pre-tax margins that are the norm in this business," said the source. The highest profit margin recorded by a manufacturer was Wrigley, and it rose from 29.3% to 31.5%.

"Some key players are feeling the pinch quite acutely," the source added. "It would not be surprising if they felt they had to defend their margin. This is not the same as profiting from inflation."

Another source pointed to fuel and electricity hikes.

An Asda spokesperson said it was absorbing more costs than rivals, pointing to the chain's 0.5% drop in margins since 2006. Sainsbury's pointed to a range of new price cuts and said: "Our 3% profit margin is not excessive." Tesco said: "Last week we announced thousands of new, real price cuts on everyday items." He added that new initiative known as Step Change had identified £450m in cost savings to reinvest in price.passing it on

£4.3bn



Commodity Inflation

A 14% price increase across all commodities forced commodity producers to pass on a huge bill to the top 150 manufacturers

£3.5bn



Passed on to retailers

These manufacturers absorbed £0.8bn of extra cost, leading to a 1.2% drop in margins, then passed on the remainder to retailers

£3.7bn



Passed on to consumers

The top five multiples grew margins over two years by passing on the full £3.5bn price increase to consumers plus a further £200m

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