Fashion Prices To Stabilise As Cotton Prices Fall

U.K. retailers are beginning to predict that clothing prices should have topped by the end of this year, which will be good news for the Bank Of England as it keeps its fingers crossed that inflation will fall as it has predicted.

Soaring cotton prices have pushed clothing prices up since the beginning of the year, a trend likely to continue in the second half, but early signals point to more stable prices early in 2012.

The two largest U.K. high street clothing retailers, Marks & Spencer Group PLC (MKS.LN) and Next PLC (NXT.LN), have seen average selling prices rise between 5% and 8% since the start of the year, and current Autumn/Winter collections are destined to be similarly dear.

But cotton prices have halved since their $2.27 a pound peak in March, and both Next and department store chain Debenhams PLC (DEB.LN) have indicated that inflationary pressure will ease in time for the 2012 Spring/Summer collections, offering a welcome respite for cash-strapped consumers.

"We're currently negotiating [with suppliers] for next year and we now don't believe we'll have to raise prices," said Next Chief Executive Simon Wolfson.

In addition, he said, pressure on annual inflation figures, which currently stand at 4.2%, will ease with the anniversary of the rise in value added tax in January and the sharp spike in oil prices in April and May.

The Bank of England still expects inflation to rise again later this year, as massive hikes in household utility bills push the figure above 5%. However, policymakers believe inflation will gradually return to 2% as temporary factors that have been boosting prices start to lessen.

Still, clothing only makes up 5.4% of the total weight of the consumer price index, and flat or deflationary prices will have some, but not a large, impact on the overall inflation figures, Darren Morgan of the Office for National Statistics told Dow Jones.

It will have a significant effect on the retailers themselves though.

Fast-fashion retailers like Hennes & Mauritz AB (HM-B.SK), Associated British Foods PLC's (ABF.LN) Primark and, to a lesser degree, Zara owner Industria de Diseno Textil S.A. (ITX.MC), or Inditex, have chosen to absorb the significant cotton price rises to maintain low prices, taking a hit on margins to maintain market share.

Societe Generale analyst Anne Critchlow told Dow Jones Newswires those who took the greatest margin pain will see the greatest gain, and is pencilling in potential margin improvement in the second half of 2012.

It can take up to a year for input costs to filter through to the price tags in store, but any respite from the relentless pressure on consumers from rising prices, higher taxes, low wage growth and job insecurity will be widely welcomed, by the government and by shoppers themselves.

By Kathy Gordon, Dow Jones Newswires; 44-207-842-9293; kathy.gordon@dowjones.com

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