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Business Comment

David Prosser: Damned if they do, and damned if they don't

Outlook Who would be a clothing retailer just now? Bad enough that the high street is right in the eye of the coming storm of the squeeze on consumer incomes, but retailers are also having to cope with surging input prices.

New Look said yesterday that it expected to have to raise its prices by 8 per cent next year because of those higher costs – chiefly a sharp increase in the cost of cotton. It was exactly the same figure as Next used in its most recent update. On top of these numbers, you have to add in the extra 2.5 percentage points of VAT customers will be paying from January onwards.

The worry for New Look and the rest is not that customers won't be willing to pay up, but that they won't be able to. As the effects of the Government's austerity package begin to be felt – caps on public sector pay, higher taxes, rising joblessness – the number of shoppers able to pay retailers' higher prices is bound to fall.

The last six months has been something of a phoney war, with plenty of talk about austerity, but not so much action. Retail spending has thus been resilient. But people know what lies ahead: the Nationwide Consumer Confidence Index has fallen in five of the last six months: the latest data, published today, puts the yardstick at its most downbeat for two years.

The inevitable consequence is an erosion in retailers' margins. Indeed, Primark has begun seeking to make a virtue out of necessity, promising to take higher costs on the chin to remain a market leader on price.

Judging from the comments of New Look, Next and others, many retailers do not feel so comfortable with swallowing the pain