Why Tesco is the Bank of England's next big worry

First it was soaring oil prices. Then bigger bills for gas and electricity customers. Now the Bank of England has another inflation worry to contend with - the rising price of food.

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First we had soaring oil prices. Then gas and electricity prices went haywire. More recently, Bank of England governor Mervyn King has voiced concerns that the supply of cheap goods from China is being endangered by soaring wage inflation in the rapidly-industrialising country.

But now the Bank has yet another inflation worry - the food price inflation.

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The heat wave experienced across the world this summer has battered harvests, driving up the price of sugar, wheat, fruit, and orange juice, while freak rain storms in Vietnam have been blamed for coffee prices hitting a seven-year high.

And the bad news for both consumers and Mr King is that the supermarkets arent prepared to take the cost increases on the chin anymore

With prices soaring in all areas of their business - from wage costs, to fuel costs, to lighting, heating and rates for their stores - it's no surprise that supermarkets are trying to pass on rising food costs to their customers.

According to the British Retail Consortium, the price of food has risen in five of the past seven months, even while the price of non-food items has kept falling. Even the price of beef is now at levels not seen since before the BSE crisis in 1996, rising 3.1% in the past year.

According to trade magazine The Grocer, Tesco has hiked the price of lettuce by 10.9%, smoked bacon by 13% and milk by 11% in just the past three months. The FT said: "Analysts believe that the latest round of price rises could signal the end of a period of aggressive competition among supermarkets as retailers act to restore profit margins and respond to rising costs."

Soaring raw materials costs aren't just down to freak weather conditions. Once again, a great deal is due to high oil prices. And the bad news is that this is only set to get worse. Many oil substitutes, such as ethanol, rely on food components in their manufacture.

The FT also reports that power generator RWE npower is considering converting its oil-fired power station in Kent to run on palm oil. The trouble is, palm oil is also found in one in ten supermarket products. So if the price of palm oil rises as a result of increased demand for power generation, it would also drive up costs for food and cosmetics manufacturers.

Consumer products giant Unilever is apparently so concerned about rising demand for rapeseed oil from biofuel manufacturers that it is lobbying the European Union to allow the use of straw and household waste in making biofuels. The FT reports: "Non-food use of rapeseed oil became more important than food use for the first time last year as demand rose for its use in biodiesel production."

It seems that there's no painless way to deal with high oil prices. You can read more about how to invest in alternative sources of oil in the latest issue of MoneyWeek, out tomorrow.

Just before we turn to stock markets - we're sorry to return to the UK property market, our favourite obsession, but this little gem just had to be acknowledged. Kent Reliance Building Society has now released the ultimate mortgage for today's debt-laden generation - the mortgage that you never have to pay back.

Purchasers can pay interest-only until the day they die, and then pass the debt onto their children - or perhaps a lucky friend. The beneficiary of this generous inheritance can then live in the house (continuing to pay the mortgage, of course), or pay off the debt if they dont want to keep it on. We're not sure what happens if you have fallen into negative equity by the time of your death - though it might be a good way to get revenge on particularly ungrateful offspring.

This is incredible. People buy property because they believe renting is dead money. But this mortgage gives you the worst of both worlds - you sign a lifetime lease to rent from the bank which ties your offspring to the house as well, but still have to pay all the maintenance bills for the house yourself. Any landlord in the country would rightly cut off an arm to be able to get away with offering the same deal.

This kind of ludicrous offer has got to be proof, for the masses of people who still seem to need it, that the housing market in this country is in a bubble of unprecedented proportions - similar products were all the rage in Japan just before the bubble popped in the late Eighties.

In any case, we doubt many people will be taking it up - with inflation keeping pressure on interest rates to rise, we don't imagine it will be much longer before the market finally collapses under its own weight.

Turning to the stock markets

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The FTSE 100 finished yesterday in the red, down 42 points to 5,860. A sell-off in the mining sector was compounded by a shaky morning on Wall Street. Concerns over slowing US economic growth saw the blue-chip index fall as low as 5,853 in the afternoon. The day's biggest losers included miners BHP Billiton and Anglo American. Support services group Brambles Industries was Wednesday's best performer, its shares up nearly 5% after it announced solid full-year results and a special dividend payment. For a full market report, see: London market close

On Wall Street, weak housing data sent stocks tumbling as investors once again expressed concern that economic growth could fall more sharply than expected. Continuing anxiety that the row between Iran and the West over the former's nuclear programme could escalate - which would send the price of oil soaring - also kept stocks lower. The Dow Jones closed 41 points lower at 11,297. The Nasdaq was down 15 points to 2,134. And the S&P 500 was 5 points lower, at 1,292.

US weakness spread to Asian markets, with the Nikkei 225 down 202 points to 15,960 with leading blue-chips Sony and Nissan among the biggest fallers.

Crude oil was back below $72 a barrel this morning, trading at $71.85 in New York. The price of Brent spot was down by nearly 2% to $71.03 a barrel.

Spot gold was trading at $622.70 today, whilst silver fell back to $12.45/oz in New York late last night, having reached its highest level since May in earlier trading.

And in London this morning, bookies Ladbrokes revealed that the World Cup had been the biggest betting event in its history, prompting a 12% jump in operating profit. The firm announced new ventures in Turkey, Italy and Vietnam, but said that it was still undecided over whether or not to enter the lucrative US market in the light of current legal uncertainty over online gambling in the country.

And our two recommended articles for today...

High oil prices make the world more dangerous - unless you own gold

- The world is a more hostile place than it was ten years ago, and there is one underlying reason why, says Brian Durrant for the Daily Reckoning - the high oil price. It may be bad news for peace and personal freedoms, but the crude rally is good for those who hold gold, though not for the reasons you might think. To find out why gold is far more than an inflation hedge, read: Why high oil prices make the world more dangerous - unless you own gold

Will rising labour costs hit corporate earnings?

- According to recent news reports, rising labour costs are hitting profit margins and, therefore, corporate earnings. But is this true? Or was the recent earnings rise simply the product of the credit bubble, which is now starting to deflate? Find out why Mike Shedlock of Whisky and Gunpowder thinks that those who blame wage inflation are missing the point by reading: Will rising labour costs hit corporate earnings?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.