As cotton costs cool will garment prices fall too?

Cotton forecast figures released this week painted a far rosier picture than anyone in the apparel industry would have expected just four months ago.

In New York, cotton for December delivery dipped to US$1.04 a pound on the ICE Futures US exchange - more than half the record high of $2.27 per pound reached in March.

And inter-governmental group the International Cotton Advisory Committee (ICAC) confirmed that prices are likely to continue to decline over the next year as production increases help to replenish stocks.

But while there's the temptation for retailers and their suppliers to breathe a sigh of relief that the roller-coaster ride may finally be over, industry observers warn it's not the end of the story.

Because of the timing of the fall in cotton costs, and the six-month lead-times to which many firms still work, any easing of sticker prices isn't going to show up until new merchandise hits the shelves next spring.

Indeed, the best UK fashion retailer Next was able to come up with when it released its first-half results yesterday (3 August) was that "2012 looks like it will be a more benign year for cost price inflation," and that "selling prices are unlikely to rise further for spring 2012."

Likewise, "there are a lot of other inflationary factors that people need to keep an eye on," points out Vinod Rangarajan, a retail strategist at consulting firm Kurt Salmon.

These include double-digit wage hikes in Central America, Vietnam and China - all of which will start working their way into the bottom line by the middle of 2012.

"Wages in China have gone up 15-20% this year, so that's obviously going to have a tremendous impact on the cost of goods," Vinod explains. "And who knows what's going to happen in terms of fuel costs and how that will impact transportation?

"So while cotton prices are coming down and commodity prices might be coming down, other factors are still going in the other direction."

Rangarajan believes another issue to watch in the longer term is factory capacity. "As we see these workers get higher and higher wages they're going to be more 'consumeristic,' so demand in those domestic markets where we're producing is going to increase.

"We're already seeing China shift some of their manufacturing capacity just to meet domestic demand. So that's going to have an impact too.