A lack of competition in the supermarket sector is making it easier for major players to charge shoppers more.
The consumer watchdog has a close eye on the big supermarkets to make sure they aren't using their market position to charge much higher prices for groceries.
Australian Competition and Consumer Commission chair Gina Cass-Gottlieb said in markets where there were few players, firms were under less pressure to compete on price.
"I would accept that there is less constraint on them in a price competition than we would want to see," she said in reference to the two biggest players, Coles and Woolworths.
The supermarket sector is dominated by the two companies although Ms Cass-Gottlieb said Aldi was growing and MetCash independent supermarkets were also adding to competition in some areas.
But she told a parliamentary committee there were several supply-side factors pushing up food prices, including problematic climate change-induced weather patterns and geopolitical factors.
"However, in a more competitive market, you may see those elements competed away."
Consumers continue to fork out a lot for groceries, according to the monthly consumer price index.
Yet price rises in the food and non-alcoholic beverages category softened slightly from 8.1 per cent in the year to March, to 7.9 per cent in the year to April.
The consumer watchdog is already cracking down on market concentration in the sector.
Last week, it opposed Woolworths' proposed acquisition of the SUPER IGA Karabar independent supermarkets due to concerns about competition for consumers in the area.
Asked if the ACCC should have divestiture powers to break up monopolies, she said it would be worthwhile for a court to have this power in the event it could be proved as a satisfactory remedy for market concentration.
She said such a power could improve competition and put downward pressure on prices.
"I wouldn't want to set up expectations in a situation of these supply side shocks, that there would necessarily be particular levels of such decreases because it's quite a complex situation that is currently being faced," she said.
Merger reforms, which Ms Cass-Gottlieb has been pushing for, would also help the ACCC keep markets competitive.
Under her preferred model, merger parties would be forced to lodge takeover deals with the regulator for approval.
