The UK's competition watchdog will "carefully monitor" whether supermarkets are passing on the benefits of falling commodity prices to shoppers in the coming months as part of its continuing investigation into inflationary pressures within the sector.

In an initial update from its enquiry, the Competition and Markets Authority (CMA) found that high food inflation is not attributable to weak competition between the major grocery retailers. However, not everyone is able to benefit fully from strong competition, and more should be done to clarify pricing so consumers can find the best deals.

The CMA noted that operating profits in the retail grocery sector fell by 41.5% in 2022/23, while average profit margins fell from 3.2% to 1.8%. This indicated that retailers' costs are increasing faster than revenues, "indicating that rising costs have not been passed on fully to consumers".

READ MORE: Food prices: Inflation eases but shoppers remain under pressure

The CMA said consumers are also shopping around more to get the best deals, which has led to discounters such as Aldi and Lidl gaining a higher share of the overall grocery market. But consumers who can't travel to large stores or shop online are missing out on the best deals as they are forced to rely on higher-priced convenience stores.

The findings from the initial two months of the CMA's investigation come days after market research from Kantar recorded the biggest drop in grocery price inflation since its peak at 17.5% in March. Promotional discounting by retailers helped that figure fall to a still "incredibly high" 14.9% in the four weeks to July 9.

"Now that some input costs are starting to fall, there are some signs that grocery retailers are planning to start rebuilding their profit margins," the watchdog said. "The CMA will monitor this carefully in the months ahead, to ensure that people benefit from competitive prices as input costs fall."

The CMA said the next phase of its review will delve into competition across the wider grocery supply chain. It will also focus on 10 individual products such as milk, bread and baby formula to get "a deeper understanding of competition and price dynamics", but added that its choice of these items "is not an indication of any provisional concerns that competition for these products is ineffective".

READ MORE: Which say more help needed as some food prices triple

The watchdog also found that not all retailers are displaying prices as clearly as they should, which is hampering people's ability to compare products. The CMA has written to retailers warning them to make the necessary changes or risk enforcement action, and is calling on the government to tighten the law around pricing displays.

"The overall evidence suggests a better picture [in grocery retail] than in the fuel market, with stronger price competition between all of the supermarkets and discounters," CMA chief executive Sarah Cardell said.

"In the next phase of our work, we will examine competition and prices across the supply chain for the product categories we’ve identified. We’ll also continue to monitor the situation to ensure that competition remains effective as input costs start to fall.”