The government may reduce retail margins on price-controlled foods, which would hurt profits at the retail chains - but also lower prices for consumers.

The retail margin is the difference between the price the retailer pays for goods, and the price at which they are sold to consumers. The Industry, Trade and Labor Ministry and the Agriculture Ministry are in charge of deciding whether to reduce the margins in order to help consumers.

Retail prices of controlled items such as certain of bread, eggs, milk and other dairy products are based on a formula developed in 1996 by the accountant Yitzhak Swary.

The formula determines how much the manufacturer may charge retailers for price-controlled items, based on maximal permissible returns on capital. For bread, for example, the maximal return is 9% - though bakeries insist their return on capital barely reaches 6% and they should therefore be allowed to raise prices.

The retail margin on price-controlled goods is estimated at about 13% to 13.5%. If the government decides that's too much, consumers would pay less. Also, if retailers are given a discount on a certain price-controlled product by manufacturers, they would have to "pass" the discount onto consumers, rather than pocket the extra profit.

Makers of price-controlled foods say that over the past year they have granted discounts to the large supermarket chains, with the chains charging the full price and pocketing the savings. Limits on retail margins would end this practice, allowing consumers to enjoy the full benefits of producers' discounts.

Producers of price-controlled products report their selling prices and profit margins on these items, so information on discounts should be transparent to the government and watchdogs.

The Industry, Trade and Labor Ministry has also been discussing ways to avoid increasing the cost of price-controlled bread by 11% at the end of the year.

"In the first stage we intend to place retail margins under control so that the retailer will be required to fully pass on discounts to consumers," said the ministry. "Work on this matter is currently under way with the Agriculture Ministry."