Bad news on inflation from Marks & Spencer

Investors are getting used to hearing good news from Marks & Spencer. But chief executive Stuart Rose's comments on shop price inflation should have the Bank of England worried...

Investors are starting to get used to hearing good news from revitalised high street stalwart Marks & Spencer.

Yesterday was no exception. The company saw like-for-like sales (that is, sales at stores open for more than a year) rise 8.2% in the 13 weeks to July 1.

The leap isn't quite as spectacular as it seems. Sales for the same period in 2005 fell 5.4%, so M&S was hardly up against challenging comparative figures. But investors were satisfied with the update, which was broadly in line with hopes. M&S shares edged higher against a falling market to close at 585p.

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But while shareholders were celebrating the good news, chief executive Stuart Rose had some bad news for the Bank of England...

Marks & Spencer's chief executive Stuart Rose was his customary cautious self when asked about prospects for the year ahead.

"I am not going to call the recovery until we get into Christmas, but as every quarter makes progress we will get closer."

In common with almost every other high street name that has reported in the past year, he justified his caution by listing the spiralling costs that are facing retailers.

"Costs in the business are going up quite considerably costs of rent, rates, fuel and cost of employees, so businesses are under a bit of stress," he told reporters.

But unlike his rivals, he suggested that the retail sector may no longer be inclined to keep absorbing rising costs.

"We are seeing a decline in deflation so there won't be the same deflationary pressures as you had in the past. Indeed, there may well be some small inflationary pressures."

We pointed out just yesterday in Money Morning that there is a limit to the amount of pressure retailers can take before they have to start hiking prices, regardless of competition (you can read the piece here: How long before UK retailers are forced to raise prices?) And it looks like the sector might now have reached that limit.

Given that it's largely shop-price deflation that has been holding back inflation in recent years, the Bank of England should be very concerned to hear the head of a major retailer saying that it's time to start hiking prices.

Another worry for the Bank will be the fact that the UK is becoming more and more exposed to soaring oil prices. In May, Britain became a net importer of oil for the first time since December.

The trade in goods deficit widened from £5.6bn in April to £6.8bn in May the second largest gap on record. Even after adding in the services surplus, the total trade gap still expanded from £3.4bn to £4.4bn.

As the UK becomes ever more dependent on foreign energy sources, it's no surprise that the Government seems determined to push nuclear power as the best way forward. Though given the fragile state of the Labour party and widespread opposition to the plans, there's no guarantee it'll get its way.

But even if a new era of nuclear power fails to arrive in the UK, it's still a sector that investors should be keeping an eye on. China and India are just two of the Asian nations currently building a series of new plants. You can find out more about how to invest in the nuclear boom in this piece from MoneyWeek editor Merryn Somerset Webb: Get exposure to Asia buy uranium.

But Asia's search for solutions to energy shortages doesn't begin and end with nuclear power. China is looking at a much older resource that could provide some equally interesting opportunities for smart investors - coal.

Royal Dutch Shell and China's top coal producer Shenhua have agreed to work on a three-year study on the feasibility of building a £3.3bn plant to turn coal into oil.

Liquefaction is an old technology, but the time seems ripe to bring it back into use. High oil prices make it economical to turn coal into oil. And importantly for China's environmental problems, the fuel produced is actually cleaner than refined products from crude oil.

And with China sitting on the third-largest coal reserves in the world, it's no surprise that Beijing is keen to push the technology as a partial solution to its energy problems.

Production could start as early as 2012. The plant would produce about 70,000 barrels of oil per day equivalent to 1% of China's overall oil demand, according to Reuters.

You can read more about coal liquefaction technology and how to invest in it in this recent piece from Martin Spring: Could coal replace oil?

Turning to the wider markets...

The FTSE 100 closed lower, down 39 points at 5,857 on Tuesday. Power supplier International Power fell 3% to 285p as it placed 200m euros worth of convertible bonds. For a full market report, see: London market close.

Over in continental Europe, the Paris Cac 40 fell 68 points to 4,914, while the German Dax shed 90 to close at 5,616.

Across the Atlantic, US stocks moved higher, despite disappointing second quarter revenue from aluminium giant Alcoa. The Dow Jones Industrial Average gained 31 to 11,134, while the S&P 500 closed 5 points higher at 1,272. The tech-heavy Nasdaq rose 11 to 2,128.

In Asia, Japan's Nikkei 225 fell 224 points to 15,249. Exporters were among the main fallers again as rising commodity prices fanned inflation fears.

This morning, oil was rising in New York, trading at around $74.45 a barrel. Brent crude was also higher, trading at around $73.05.

Meanwhile, spot gold was sharply higher, trading at around $641.60 an ounce, as the train explosions in Mumbai boosted safe haven buying. Silver was higher too, trading at around $11.52 an ounce.

And in the UK this morning, Branston Pickle owner Premier Foods has agreed to buy the UK and Irish units of the Campbell Soup Company for £450m.

And our two recommended articles for today...

Spot the bubble - property or mining shares?

- Both mining stocks and property shares have risen dramatically in the past few months. So are investors pouring money in because these assets are worth buying, or simply because everyone else is? A good indication that a peak has been reached is when insiders start to sell out. And that's exactly what's happening in one of these sectors right now. To find out whether you should steer clear of properties or dump your mining shares, see: Spot the bubble - property or mining shares?

Why an inflationary bust is inevitable

- The world's economies have never before been so closely intertwined. The current boom has reached every corner of the globe - but it requires the creation of more and more easy money to sustain it. Dr Marc Faber in Whiskey & Gunpowder believes that despite recent market fears over rising interest rates, central banks will be unable to resist pumping more money into the system to keep the boom going. To find out why that means inflation is set to soar before a global recession hits, see: Why an inflationary bust is inevitable

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.