Investors will be looking for signs that consumers are cutting back on more expensive food when Marks & Spencer announces its full-year results on Wednesday.
The retail giant is expected to show that pre-tax profits reached £522 million in the year to the end of March.
Food sales are predicted to rise 10.3% while clothing and homeware sales are expected to climb by 46.6% compared to the same period last year.
But with inflation reaching a 40-year high of 9% in April, the squeeze on households’ disposable income could mean consumers turn away from more expensive food items in favour of a cheaper shop.
Analysts also warn M&S may be forced to raise clothing and homeware prices across its stores in the months ahead.
Economists say lower-income households are being worse hit because they spend a larger portion of their incomes on energy bills, which are rising rapidly.
It means they are facing double-digit inflation while wealthier families are less affected by the cost-of-living crisis.
This could mean M&S’s customers, who tend to be more affluent, are insulated from rising prices while the supermarket could benefit from people opting to eat in rather than dine out.
Sophie Lund-Yates, an analyst at Hargreaves Lansdown, said: “Marks & Spencer finds itself in a tricky spot with inflation running high.
“Mid-week treats are likely to be rubbed off shopping lists, meaning the food business may be in for a tough time, as households scramble to economise.
“The flip side of this of course is that the group’s core demographic is unlikely to be too perturbed by the cost-of-living crisis, which should offset some lost sales.”
Shareholders will also have a watchful eye on M&S’s clothing and homeware business which has recently enjoyed a boost in popularity.
Before the pandemic the division struggled with sales for several years. It was later also hit by store closures during lockdown but has since bounced back to profit.
Ms Lund-Yates added: “The clothing business has had a very tough few years, but has made good progress of late.
“Most importantly, growth online is what to watch next week. A failure to keep hold of digital momentum is unlikely to go down well with the market.”
M&S reports its full-year results on Wednesday May 25.