MoneyWeek recently reported that Chinese manufacturers are finally being forced to pass on higher costs to retailers because of higher oil and energy costs. Referring to the UK economy, MoneyWeek said:
As anyone who has to pay energy bills, taxes, fill a car, or pay for private education or healthcare knows, life in the UK is getting more expensive in all kinds of ways.
But there’s always been one thing you can rely on. Clothes are cheap, and getting cheaper. Alongside consumer electronics, anything with a ‘Made in China’ tag – or in many other developing nations, for that matter – just seems to keep falling in price. That’s a key factor in why the consumer price index (CPI) measure of inflation has been so tame in recent years.
Now it looks like cheap clothes may soon become a thing of the past, like cheap food, and cheap petrol. Simon Wolfson, the chief executive of Next, warned that clothes prices may have to rise by up to 5% to offset rising costs from China and Europe. The strong euro and demands for higher prices from Chinese manufacturers mean that “we will begin to see higher costs coming through in spring, summer next year. The way that retailers are going to have to cope with this is to pass the increase on.”
That 5% may not sound like much, but we haven’t seen clothing price inflation in more than 10 years. And once the price of clothes starts going up – well, nothing will be getting cheaper any more.
These same trends have been reported in the U.S. where Chinese suppliers are finally starting to pass on higher costs to retailers after years of absorbing them due to their labor cost advantage. With margins so thin (or negative at companies like Next), consumers will begin to see higher prices as well.
When these cost pass throughs begin to be felt, we should also start to see core inflation begin to tick up. This will severely limit the options for Central Bankers, especially in Europe.