Soaring cotton prices put pressure on inflation

Soaring cotton prices threaten to put further pressure on inflation amid a chorus of warnings over the likely impact on price tags.

Devastating floods in Pakistan - one of the world's largest producers - and fears over this year's crop in China have sent cotton prices surging to 15-year highs in recent weeks.

High street fashion giants Primark, Next and Debenhams have flagged cost pressures as tightening global supplies threaten to push up prices.

The cotton crisis comes at a bad time for retailers, who are already battling against a range of factors, such as higher freight costs, wage inflation in China and the impending VAT hike to 20% in January.

Retail experts at Verdict Research are forecasting that clothing inflation will hit 4.4% in the UK this year - the highest level for 24 years.

And Next sent shivers through the sector when it said last month that prices may rise by as much as 8% in 2011, with budget retailer Primark adding to the woes by cautioning over profit margins in the face of higher cotton costs.

The latest figures show that cotton prices are up 54% year-on-year, with the floods in Pakistan seeing supply fall far short of demand.

India - another major producer, alongside China, Pakistan and the United States - has compounded concerns after its textile industry called for an export ban until next year to ease supply issues.

There had been predictions of a bumper cotton crop from India this year, but reports now suggest heavy rain in both India and China could leave levels short of expectations.

Higher cotton prices have a huge bearing on the cost of clothing, with fabric accounting for around 60% to 70% of product price.

Debenhams said high cotton costs are likely to impact those at the value end of the market most and hopes to be able to absorb much of the price rises.

Primark remained tight-lipped on whether it would increase prices, but its caution over margins suggests the group is planning to take a significant hit to maintain its cut-price reputation.

Neil Saunders, consulting director at Verdict, said most will have little choice but to increase the cost to consumers.

"It means ultimately we will end up paying more for our clothes," he said.

There are fears the recent inflation pressures will mark the end of cheap clothing, such as £8 Primark tops and £2 t-shirts.

But Mr Saunders added that the budget retailers may be able to hold off price hikes by driving large volumes of sales.

"Retailers who will struggle to grow volumes will have to take a hit on profits or put up prices - that means those in the middle market, such as Next, Bhs and Marks & Spencer," he said.

Verdict has pencilled in sharp clothing inflation next year as well, at 3.6% in 2011, as it believes retailers will spread the impact of the higher input costs and VAT increase over two years.

The British Retail Consortium (BRC) is less fearful over the impact of cotton prices, given its cyclical nature. "There's no reason that this will be a one way trend. Also, UK retailers are highly competitive and one of the factors they compete heavily on is price," said a BRC spokesman.

Clothing price rises must also be put in context, with the recent inflation spike coming after 10 years of sharp deflation.

The cost of clothes in the UK fell by around 2.6% each year between 1998 and 2008, according to Verdict, but it said deflation came to an end last year when prices edged up by 0.3%.

"The increases we're seeing now are partly just an unwinding of those falls," said Mr Saunders.