Rising Cotton Prices May Mean Pricier Clothing
Gap (GPS) and Walmart (WMT) will probably raise the prices of their products that are made of cotton -- and the increases could be steep. The price of cotton has surged to record levels. Bloomberg reports, "It's a little terrifying to deal with cotton suppliers now," said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held Jiangsu province-based clothesmaker that counts Gap and J.C. Penney among its clients.
And, cotton may not be the worst of it. The prices of meat, sugar, and coffee, among other commodities, are at or near record levels. Starbucks (SBUX) recently raised prices, as did General Mills (GIS). The prices of cotton-based products like clothing will be higher this holiday season. It is the beginning of what is likely to be a period of inflation at the retail level and consumers will see increases in the prices of everything from candy to steak.
A criticism of the Fed's quantitative easing program (QE2) is that it might cause inflation by creating low interest rates that will lead to bubbles in areas like real estate. In reality, it is unlikely to be the Fed's actions that will be the primary driver of inflation. A surge in the prices of commodities from gold to turkey will cause inflation at the consumer level -- and that appears to be coming on fast.
The alternative to inflation is lower corporate margins. If companies like Hershey (HSY) or Kellogg (K) cannot pass along their rising costs, corporate earnings are bound to be eroded. So, it is either the consumer or the shareholder who will feel the pain -- and neither scenario will help the economy.
Inflation is back and the consequences are likely to be ugly.