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How long before UK retailers are forced to raise prices?

Inflation is rearing its head across the globe. Here in the UK, the latest data on manufacturers' prices may have the Bank of England worried...

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Pressure on central banks around the world to raise interest rates is increasing all the time.

US investors hoping for a reprieve at the next Federal Reserve meeting were dealt a blow when Friday's jobs data showed that wage inflation picked up to an annual rate of 3.9% in June.

Our own Bank of England has taken an apparently relaxed attitude towards rates in recent months, with little sign of a shift in either direction.

But the latest news from the manufacturing sector suggests that the relentless battering from soaring raw material costs may finally be starting to push its way through to the high street...

UK manufacturers are starting to push some of their rising costs onto their customers. Even though the annual rate of growth in input prices actually fell from 13.7% to 11% in June, factories raised output prices at an annual rate of 3.3%, up from 3.1% in May.

And the news was, unusually, even more worrying for those who prefer to focus on so-called core' inflation.

The inflation rate, excluding food, drink, tobacco and petrol prices, actually jumped more than the overall inflation rate, rising from annual growth of 2.5% to 2.9%. That's compared to the 1.3% seen at the end of last year.

Analysts tried to put a brave face on the jump, saying that retailers would just absorb the rise in prices. "Higher output prices are probably a bigger threat to retailers' margins than they are to the inflation outlook," reckons Paul Dales of Capital Economics.

We're not so sure. Rising supplier prices are just one of the many pressures squeezing retail margins.

Soaring raw material prices don't just hurt manufacturers. Retailers have to light and heat their premises too. They also have to pay rates, and deal with rising minimum wage bills something which is less of a worry to higher-paying manufacturers. And with the EU continually interfering in the Chinese export market, another source of cheap products is under threat.

Sure, intense competition on the high street makes it tough for retailers to hike prices. But competition between manufacturers for retail custom is pretty intense too, and yet rising input costs have finally forced through price rises in that area.

With no sign of oil or gas prices retreating any time soon, margins will be feeling the squeeze for the foreseeable future. There's only so long that the retail sector can hold out before it has to push price rises onto its customers too. And that's when the Bank of England will really start to worry.

Of course, not everyone fears inflation. Interest rates are expected to rise in Japan later this week, signalling that the country has waved goodbye to deflation once and for all.

Earlier this month, Bank of Japan governor Toshihiko Fukui described Japan's current zero-interest-rate policy as "abnormal" and said the country was "expected to achieve long-lasting expansion."

The latest news on borrowing has added to the impression that the economy is more than sturdy enough to withstand a little quarter-point tweak in interest rates.

Bank lending grew at an annual rate of 1.8% in June, the most in more than 10 years.

"Banks are adopting a more proactive attitude toward lending and there is more demand for loans because businesses are doing quite well," Frances Cheung of Standard Chartered Bank in Hong Kong told Bloomberg.

The "proactive approach toward lending" is the key here. People often talk of the Bank of Japan's zero-interest-rate policy as being "ultra-accommodative". So why haven't consumers been borrowing like crazy when you can basically get money for free?

The answer is that lending criteria have actually been pretty tight. Banks' appetite for risk dived after the credit bubble burst in the 1990s. Land and stock prices slumped and companies were saddled with debt.

As Bloomberg puts it: "Banks, which had secured loans with land as collateral, became reluctant to extend credit, plunging the economy into more than seven years of deflation.' Loans have fallen by more than 20% since records began in 1991.

Now on the other hand, the latest Tankan survey of business confidence found that companies believe the lending environment is "the most accommodative" since records began in 1998.

The good news for banks is that when the Bank of Japan hikes interest rates to 0.25%, they will have an excuse to hike their lending rates. And just like banks in the UK, they won't bother increasing the amount they pay on savings accounts. That makes their lending more profitable, which in turn increases their desire to dish out more loans to more people.

MoneyWeek's James Ferguson predicted the end to the Japanese credit crunch last year. You can read his explanation of why the improved lending picture is good news for Japanese property markets here: Don't miss the next Tokyo property boom.

Turning to the wider markets...

The FTSE 100 closed higher, up 8 points at 5,876 on Monday. Airline British Airways was buoyed by falling oil prices, rising 2% to 366p. For a full market report, see: London market close.

Over in continental Europe, the Paris Cac 40 gained 28 points to 4,982, while the German Dax rose 24 to close at 5,706.

Across the Atlantic, US stocks were mixed. Technology stocks fell on fears that companies will invest less in IT upgrades in the face of higher interest rates. Second quarter profits at both computer maker EMC Corp and telephone equipment firm Lucent Technologies missed Wall Street's forecasts. The Dow Jones Industrial Average gained 12 to 11,103, while the S&P 500 closed 1 point higher at 1,267. The tech-heavy Nasdaq fell 13 to 2,116.

Fears over the strength of the US technology sector spilled over to peers in Asia, sending markets lower. Japan's Nikkei 225 fell 78 points to 15,473.

This morning, oil was lower in New York, trading at around $73.40 a barrel. Brent crude was also lower, trading at around $71.65.

Meanwhile, spot gold fell as far as $621 an ounce before rebounding to trade at around $627. Silver was a little higher, trading at around $11.09 an ounce after falling as low as $11.05.

And in the UK this morning, retailer Marks & Spencer reported that sales at stores open for at least a year rose by 8.2% in the three months to July 1, compared to last year. Sounds pretty good - but it was actually a little less than the market was expecting, and shares have ticked lower in early trading.

And our two recommended articles for today...

How to be a value investor like Warren Buffett - Many a fund manager has been proclaimed the new Buffett, but none can boast a performance record even approaching his. In order to follow in the footsteps of America's most famous value investor, you need the courage and confidence to stick to some fundamental principles, says MoneyWeek editor Merryn Somerset Webb. To find out what they are, and which under-priced shares are a good place to start, read: How to be a value investor like Warren Buffett.

Is inflation really the biggest threat to the US economy? - The fear of inflation is the main thing worrying Wall Street at the moment, but is it really the greatest threat to the US economy? Jeremy Batstone of Charles Stanley believes we should be far more worried about the state of the US property market and the risk of a consumer spending slowdown. To find out why, and what it could mean for your investments, see: Is inflation really the biggest threat to the US economy?

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