The Australian government has today (22 January) directed the country's competition watchdog to commence a formal inquiry into grocery prices in a bid to fight inflation.

The inquiry will look at the structure of the grocery supply chain and competition issues for stores, in particular looking at pricing by Australia's two biggest retailers, Woolworths and Wesfarmers, owners of Coles supermarkets.

The Rudd government wants to ensure working families are getting a "fair deal at the supermarket".

"We want to know if more can be done to ensure working families have access to a competitive market for basic food items," said a spokesperson for the Rudd government.

"We have instructed the Australian Competition and Consumer Commission to take a broad approach to its inquiry and ensure all aspects of the chain are included - from the farm gate to the checkout counter."

The inquiry will consider the current structure of the grocery industry at the supply, wholesale and retail levels including mergers and acquisitions by the national retailers, the nature of competition and the price practices in the grocery industry, and factors influencing efficient pricing of inputs along the supply chain.

The ACCC is required to report its findings by 31 July.