Clothing retailers, hit last week by a raft of disappointing economic data, were left reeling again yesterday when cotton prices exceeded the $1-a-pound barrier for the first time in 15 years.
Contracts for December delivery jumped by nearly 4 per cent to $1.0198 in New York yesterday, and were later matched by prices in Asia. The increases are the market's reaction to limited supply, largely as a result of the devastating floods that have hit a number of countries in South Asia in recent weeks, strong demand, and inventories being run down.
Longer-dated and more heavily traded future contracts for delivery in May next year made even larger gains.
The Department of Agriculture in the US, which acts as the benchmark for crop markets, has forecast that cotton inventories around the world will fall in 2010-11 to 45.4 million bales, the lowest level for 14 years.
"This is the perfect storm for cotton prices," said Michael Haigh, head of commodities research at Standard Chartered.
"You've almost got a check box of factors: demand, supply and inventory. These factors are all moving in the same direction, justifying the current market prices. We don't see any correction in the short to medium term."
Already battling against worrying sales figures, fragile consumer confidence and next January's VAT increase, the cotton price gains will come as a blow to several of the UK's biggest high-street clothing names.
In recent weeks, Associated British Foods (owner of Primark), Debenhams and Next have all warned that rising cotton prices are likely to push up prices at the tills.
"For 2011 we are experiencing significant product cost price pressure from around the world. The price of cotton has increased by 45 per cent since this time last year, which is pushing up fabric prices," said Lord Wolfson, chief executive of Next.
"We believe that selling prices of like-for-like product will rise in the region of 5 per cent to 8 per cent."
The spike in cotton prices will also have been noted by the Bank of England's Monetary Policy Committee. Minutes from the MPC's last meeting, which will be published tomorrow, are expected to show some dissent over this month's decision to keep interest rates at a record low 0.5 per cent, especially with the Consumer Price Index at 3.1 per cent in August, still well above the Bank's 2 per cent inflation target.
Last week, the quarterly inflation expectations poll published by the Bank showed that consumers are expecting a 3.4 per cent hike in inflation in the next 12 months, with increased retail prices a factor.
But despite the gloomy picture painted by Lord Wolfson, the British Retail Consortium, which represents the interests of the retailing industry, has sought to play down the risk of rising cotton prices being passed on to the consumer.
"Of course, this comes as an added pressure, but retailers are highly competitive and will try their best to minimise the impact on consumers," said Krishan Rama at the BRC.
The cotton price jump comes ahead of Friday's emergency meeting of the United Nations' Food and Agriculture Organisation to discuss rising soft commodity prices.