The Government has bowed to public opinion and is backing a parliamentary inquiry into why milk prices are so high when New Zealand is a leading milk producer and many families are struggling to make ends meet.

Labour and the Greens have been calling for a select committee inquiry after the Commerce Commission last week said there was nothing it could do under the Commerce Act to further investigate soaring consumer prices for milk.

While Agriculture Minister David Carter was initially cool on the idea, Prime Minister John Key yesterday said his caucus had confirmed the Cabinet's earlier decision to back the inquiry.

The decision saves his Government the embarrassment of opposing the inquiry only to have it go ahead anyway - Act holds the balance of power on the select committee and has followed through on its earlier indications by backing the inquiry.

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Labour MP Lianne Dalziel who chairs the commerce select committee which will conduct the inquiry said the Government often made decisions it was going to be forced into anyway.

"I believe that the weight of public pressure had a lot to do with it as well, there were lots of people calling for an inquiry."

Consumer NZ chief executive Suzanne Chetwin was one of those.

"We're really pleased and I think it's dawned on National how important this issue is with the public.

"They obviously have done some polling that shows that there is a public [concern] about food prices generally and milk is just the one that's tipped it."

Mr Key said the next step was for the select committee to draw up its terms of reference for the inquiry.

Ms Dalziel said hearings could be held and a report presented to Parliament before the election although there were many issues to look at and not much time.

While the committee could make recommendations to Parliament it did not have the power to change laws.

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"The most powerful element of what we can do is to put everything into the public arena and give it the scrutiny it deserves."

Act's parliamentary leader John Boscawen said his party backed the inquiry because it wanted an investigation of "the real issue - "all of the costs heaped on farmers by both the Labour and National Governments over the past 10 years".