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Investment view

I returned from my holiday to find an altogether better tone to the stockmarket. It might not last but it is a pleasant reminder that share prices can go up as well as down. The news on the economic front has certainly been rather mixed recently. Consumer sales appear to be stalling. In a way, this is not surprising. March was pretty much taken up with the war in the Middle East – hardly the background against which you wish to be seen to be spending for Britain. Also, Easter is late this year so we may find the position reversed in April.

Inflation figures released last week show that the rise in the cost of living has stuck doggedly at 3 per cent – above the Chancellor&#39s target. It is probably too early to see any benefits coming through from a lower oil price but you cannot help wondering whether inflation will rise again to become the bugbear of choice. This wouldn&#39t necessarily be a bad thing.

Part of the reason for inflation having been kept in check in recent years has been the downward pressure on prices that has stemmed from China. There is much talk about overcapacity in US industries but the position in this burgeoning superpower has been every bit as difficult. Its sheer size should ultimately provide a solution in the form of greater internal demand but China was beginning to find it was a little overgeared for a world economy that was slowing. Its solution was price-cutting. That said, China&#39s economic performance in the first quarter of this year has been stunning. Its economy grew by more than 9 per cent – the fastest rate of growth it has achieved in a single quarter for more than six years. Membership of the World Trade Organisation has encouraged foreign investment, which rose to a record £53bn in 2002 and grew by more than 50 per cent in the first quarter of this year compared with the same period in 2002.

There are other signs that prospects are looking up for China. Manufacturers&#39 output prices rose by a bigger than expected 0.5 per cent in March. Although much of this increase was down to petroleum products, it was still 2.5 times the consensus forecast and a number of key products did rise relatively sharply. While economic statistics like factory gate prices are usually viewed as the prerogative of serious economists, they do deliver an important message. This time, the message is that pricing power may be on its way back.

The absence of pricing power in a variety of industries has made the life of the stock analyst particularly difficult. If companies do not have the ability to raise prices, how much profit might they make in future? This lack of pricing power has been put down to a variety of influences including the growth of competition from China and other developing nations, as well as the use of technology in allowing cheaper lines to be sought more easily by distributors. The canny nature of the consumer has been ever present as people try to spend their money more carefully.

The return of pricing power could mean a return to inflation. This need not be a bad thing, provided it is kept within reasonable bounds. Inflation flatters profits and asset values.

Of course, it could mean that those saddled with ownership of part of the massive debt mountain that has been quietly accumulating on both sides of the Atlantic will be hit in their pockets by higher interest charges. But it may do some areas of the stockmarket little harm. We now need to watch these early warning signs as closely as any economist.


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