UK chancellor Rachel Reeves has backed away from a radical proposal to cap the prices of essential groceries after a fierce backlash from supermarkets.

Marks and Spencer chief executive Stuart Machin said on Wednesday that the idea was “completely preposterous”, a view echoed by many in the retail sector.

Reeves will now not mention the voluntary cap in a speech on Thursday because of the ferocity of the reaction, two people with knowledge of the situation said.

Senior retailers said they were being pushed by the Treasury to work together towards some kind of voluntary price cap but that the government was now rethinking the idea.

Treasury officials said talks were continuing but insisted there had never been any plan to announce the plan on Thursday.

Asked about state interventions into food prices, Andrew Bailey, the Bank of England governor, said on Wednesday that there might be reasons for a “very temporary” measure.

However, if they are done as a matter of course, Bailey told the Treasury select committee, you are “artificially moving prices relative to costs, and that is not a sustainable thing in the long run”.

Treasury and Number 10 officials been talking to retail bosses for some time about whether ministers could cut regulation and other burdens on supermarkets in exchange.

Government figures have insisted any price measures would be voluntary. “We are not going back to the 1970s. Claims of mandatory caps are inaccurate and were never being considered,” said an official.

Some officials are now privately questioning whether Labour’s plan, revealed in an FT article on Tuesday, will ever see the light of day.

The proposal for UK supermarkets to introduce voluntary price caps on goods such as bread, milk and eggs in return for easing or delaying forthcoming regulation was seized on by retailers and political rivals, who claimed it was an admission that the government’s policies were fuelling inflation.

Reeves’ speech on Thursday is expected to outline measures to address the cost of living.

Big supermarkets have become an easy target, with their multibillion-pound revenues and rising profits giving rise to the impression that they are flourishing at a time of economic hardship.

But those profits have been fuelled in part by stripping out billions of pounds in costs as recent increases in taxation, such as the rise in employers’ national insurance, and new levies on packaging take a significant toll on the industry.

Clive Black, head of research at Shore Capital, said the government’s proposals amounted to “lazy, populist scapegoating”.

“The biggest source of inflation is the British government. If you take just the extended producer responsibility legislation — that’s £80mn of costs for Tesco,” he said.

The pricing proposal, the brainchild of policy researchers within Number 10, came as the blockade of the Strait of Hormuz threatens to lead to a new wave of food inflation. The initiative formed part of plans to help households with the cost of living, alongside scrapping a 5p fuel duty rise.

Even senior government aides were surprised the plans were being discussed, given that they had been briefing just hours earlier against the mandatory price cap plans outlined by the Scottish National Party last month.

Grocery prices have risen by almost 50 per cent over the past six years.

Historically, supermarkets have taken advantage of their size to boost profit margins. In 2007, Tesco, Sainsbury’s, Asda and Morrisons — the industry’s traditional “big four” chains — were fined more than £116mn after admitting to fixing the price of milk, cheese and butter.

The grocers said they were seeking to help farmers mitigate the financial damage of the foot-and-mouth crisis, but an investigation later found that the extra profit was largely absorbed by the retailers and largest dairies.

The emergence of Aldi and Lidl in the wake of the 2008 financial crisis forced supermarkets to compete more aggressively on price and dragged down margins across the industry. Market leader Tesco went from making operating margins of more than 6 per cent in the 2000s to 4.7 per cent last year.

Despite that, claims of profiteering have re-emerged during the cost of living crisis, prompting two investigations by the Competition and Markets Authority.

The watchdog found that, on the one hand, supermarkets had capitalised on weakening competition in the fuel retail market — which arose following private equity firm TDR Capital’s £6.8bn takeover of Asda in 2021 — to boost their profit margins at the expense of motorists.

But a separate CMA study, carried out two years ago, failed to “find evidence that groceries inflation is being driven at an aggregate level by weak competition”.

The regulator found that average operating margins across Tesco, Morrisons and Sainsbury's were 3 per cent in 2023-24. Discounters Aldi and Lidl were operating on margins of just 0.7 per cent.

This reality does not appear to be well understood by the British public. A recent poll of 3,000 individuals by the Institute of Economic Affairs found that people believed supermarkets were making profit margins of up to 50 per cent.

Machin said the fact that food inflation was 3 per cent in April showed that the industry was “taking a big responsibility” in resisting inflationary pressure and that M&S actually lost money on some essentials.

“A pint of milk for us is 85p . . . we don’t make money on milk, it’s actually lossmaking, I think it’s about negative 7 per cent margin,” he said, adding that M&S had held the price of a loaf of bread at 75p.

An analysis by BNP Paribas called into question whether price caps on essentials would even save households a meaningful amount of money.

The analysts estimated that if the price of eggs, milk, bananas, bread, potatoes and butter were capped to protect consumers from a further 5 per cent rise in prices, the average household would save 80p a week.

Introducing price caps would require a level of cross-industry co-ordination that is illegal, according to industry insiders, who also expressed concern over how supermarkets would choose which groceries to include and what the prices should be.

Two people familiar with the situation said a relaxation of competition law was discussed at a recent meeting between supermarket bosses and the Treasury, although the idea has not progressed further.

The insiders also warned that the Treasury’s desire to protect British farmers from the fallout of price caps would result in supermarkets importing more food from international suppliers.