20161018_141640

UK Inflation rises rapidly as the Consumer Price Index published today shows. CPI moved upward to 1% year on year from the August year on year figure of 0.6%. There are two main reasons underlying the upward trend. First, clothing prices have increased significantly after a period of flat-lining or decline. Second, transport costs are moving up owing to a decline in the GB pound against the US dollar impacting oil prices. Transport is the more worrying trend as this feeds into all consumer goods. Suppliers and retailers will want to pass on these costs to maintain their own profit margins.

Inflationary pressure

These inflationary pressures are likely to remain as the UK economy enters 2017. There is likely to be a call for increases in wage rates particularly by those in sectors where wages have been stagnant since the financial crash in 2008. Christmas may be more expensive for consumers this year. It might be time to reach for those personal flotation devices like the money you keep under the mattress to get those presents this year.

outerwear
Photograph by Joe Parks

Women’s outerwear contributed price rises of 6.0% between August and September 2016, compared with a rise of just 3.3% a year ago. This is much higher than usual and it is not known how much is directly attributable to Brexit and the depreciation of sterling. What is clearer is that the depreciation in sterling is likely to increase the cost of importing goods. It is also now more expensive than a year ago to outsource production which may have a positive effect on UK manufacturing.

Figure 1 Year on Year Change in Consumer price Index by Category

figure-1-contributions-to-the-cpi-12-month-rate-september-2015-and-september-2016

Source: CSO

Conclusions

It will be interesting to observe the interplay between inflation and exchange rates in the coming months. This will determine the impact on industry cost structures in the year ahead. The balancing act of how these changes impact on the economy as a whole will become clearer. Claims that the lower exchange rate will help exports have to be balanced against claims that input costs rise as imported goods become more expensive. A critical marker will be the impact on consumer spending. If consumer confidence declines then so too will economic growth fueled by that spending. Higher inflation will influence delayed expenditure on higher priced goods and less disposable income for discretionary goods such as restaurants, hotels, recreation and culture as well as some clothing categories.

 

 

Why your clothes may cost more in the UK in 2017 – Will profits fall as prices rise?

8377862576_bc4450a970_z

When you walk down the High Street if you were to look at labels inside many of the clothes you buy you will see China, Bangladesh and Turkey prominent among others. Between them these three countries supply about 50 per cent of your clothing on the UK High Street, if not more. Prices have been low for the past decade and many retail brands have made substantial profits by sourcing product from these countries. Wage costs have increased in China and put pressure to increase prices charged to European and US Retailers. China itself has sought ways to lower its own cost base by managing complex supply chains with other countries such as Myanmar, Cambodia and Vietnam where labour costs are lower.  Bangladesh too has pushed up wage rates although they remain very low. Turkey pays higher wage rates than either of these two countries already but its quality and proximity to Europe with faster supply times keeps it competitive.

However, now it is not just labour costs but worsening exchange rates on imports that will impact the cost and of course push up the prices you pay at the checkout together with inflationary pressure. In future as BREXIT becomes a reality new tariffs may kick in too. The inflation rate measured by the Consumer price Index (CPI) stood at 0.6 per cent in the year to August 2016. The inflation rate for clothing was negative at 1.2 per cent. Is this about to change too, as China, Bangladesh and Turkey seek higher prices for their goods and the exchange rate against world currencies falls?

Figure 1 Consumer Price Index (CPI)

figure-b-cpi-12-month-inflation-rate-for-the-last-10-years-august-2006-to-august-2016

Source: CSO, 2016

As for the GB Pound against the Chinese Yuan that has fallen to 8.21 from a high of 10 just over a year ago. The Bangladesh Taka has fallen from 120 to the pound to 95.5 in the year to September 2016. The Turkish Lira has also fallen from a high of 4.70 in September 2015 to 3.78 in September 2016. These shifts alone will push up UK cost of clothing from these supplier countries.