Cottoning On

03/12/2010 at 10:45 am

The textile industry in Britain is not what it once was, so UK observers can be forgiven for making relatively little of the news that the cotton price is on the verge of posting its biggest annual increase since 1973.

Behind the rise is burgeoning demand from China. Now the Chinese have dominated the textile market for years, as they have done so much of the manufacturing sector. In fact, cheap Chinese clothing imports could be relied on to exert deflationary pressure on the UK for the whole of the last decade: the clothing and footwear component of the RPI fell by an average 2.9% per annum over 2000-2009.

Not any more. Last month, the price of clothes and shoes in Britain had risen by 9.2% on the year, just shy of the 9.4% annual rise posted in October – the highest rises in 30 years. Although clothing and footwear accounts for only 4% of the RPI “basket”, the scale of these increases means it made up 0.4% of the 4.5% rise across the index as a whole.

What has changed is that the Chinese are no longer just a nation of export manufacturers; domestic demand has added massively to the pressure on world commodity supply. (The robustness of the domestic economy was behind the surprising mildness of the Chinese slowdown over 2008-9 amid the frenzied collapse of its export markets.)

Chinese demand for construction materials, and raw materials in general, has been an established feature of the commodities landscape for the last few years. But the upward pressure on cotton is new.

What other price pressures will emerge as the populous economies of Asia continue to develop? And how serious will the effect be on the price of goods here at home?

All we can say for now is that such pressures are unlikely to abate as the rest of the world recovers from recession. And phrases such as “biggest annual increase since 1973” are frankly chilling in an inflationary context.

The job of our central banks never seems to get any easier ..

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