The cost of UK clothing is forecast to rise this year by the most in more than two decades as a number of factors, from Britain’s borrowing burden to labour unrest in China, conspire to push up prices on the high street.
Verdict, a retail research group, forecasts clothing inflation of 4.4 per cent this year, the highest level since 1986.
The forecast will be bad news for consumers, who have become used to ever cheaper garments and are set to see their incomes squeezed by austerity measures. It will also heighten fears over inflation, which remains stubbornly high.
“Despite the additional pressures on the consumer, prices can’t defy gravity forever and, ultimately, over the next few years the only way will be up,” says Neil Saunders, consulting director at Verdict.
According to one senior executive at a leading UK retailer: “Inevitably the whole industry will see price increases.”
British consumers have enjoyed a decade of deflation as value retailers such as Primark and supermarkets have whittled away prices, while China’s emergence as a manufacturing base brought the cheap clothing that has reshaped the high street. But this era is coming to an end, as the weakness of sterling makes garments purchased with dollars from suppliers in Asia more expensive.
Last year, British retailers were able to offset higher costs from currency weakness by striking competitive deals with Chinese suppliers keen to keep factories running amid a dearth of US orders. Lower commodity prices also fed through to better terms from suppliers.
But Chinese factories are now winning more orders, while the country’s wage costs are rising as Chinese workers strive for better terms and conditions. Suppliers’ leeway to offer deals has been clipped by their own costs rising. Cotton has gained about 50 per cent in the past year, and is trading close to its highest level in 14 years.
Shipping costs have also escalated, while British retailers are experiencing a “double whammy” according to Luca Solca, analyst at Sanford C. Bernstein, from the weakness of sterling – reflecting Britain’s overstretched balance sheet – and a rising renminbi.
Factors closer to home are also playing a part. Mr Saunders says the 2010 forecast reflects the increase in VAT from 15 per cent to 17.5 per cent in January this year. But it also allows for retailers raising prices towards the year end to reflect the increase to 20 per cent this coming January.
“We think retailers are going to start easing [price increases] into the back end of this year. It’s easy to do on winter stock because its heavier and more expensive,” he says.
While store groups may desperately need to raise prices, the consumer environment remains fragile. If retailers cannot pass price increases on to customers, this will hurt their profits. Richard Hyman, strategic retail adviser to Deloitte, says the question is “will the consumer literally and metaphorically wear price increases?”
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