Why Surging Clothing Prices Won't Drive U.S. Inflation for Long

(Bloomberg) -- A surge in U.S. apparel costs helped fuel above-forecast inflation for January, sending Treasury yields higher on Wednesday. But the era of markdowns for struggling retailers is far from over.

Clothing prices, which account for 3 percent of the consumer price index, jumped 1.7 percent in the biggest monthly gain since 1990, Labor Department data showed Wednesday. That helped the so-called core CPI, which excludes volatile food and energy costs, to rise 0.349 percent, above the 0.2 percent median estimate of economists.

Economists had penciled in some payback in apparel prices in January after heavy discounting during the holiday season, though not this much. The latest gain followed declines of 0.3 percent in December and 0.9 percent in November, and prices remained 0.7 percent below a year earlier. One big boost in January came from women’s apparel costs, which jumped a record 3.4 percent.

Why so much price volatility? Apparel doesn’t have the appeal that it once enjoyed among shoppers. In 1977, Americans spent 6.2 percent of their household budgets on clothing, according to government data. These days, it’s half that, as shoppers now choose to spend more cash on travel, activities, and technology. Low-cost fast-fashion chains such as H&M, Zara, and Forever 21 have opened hundreds of stores across America over the past decade, driving clothing prices down.

“The trend in apparel prices has in general been more down than up in the past few years,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “If we’re going to see an uptick in inflation on a sustained basis, I don’t think apparel will be one of the main sources.”

Why Surging Clothing Prices Won't Drive U.S. Inflation for Long

Without the boost from apparel, the core CPI would have advanced slightly less than 0.3 percent, according to Stanley and JPMorgan Chase & Co.’s Michael Feroli.

Granted, the overall consumer price gauge also rose a more-than-projected 0.5 percent from the prior month, indicating broad-based inflation is gaining some traction and renewing investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated.

“We generally think the inflation numbers will be moving higher this year,” said Feroli, JPMorgan’s chief U.S. economist. Apparel “is one of the more volatile categories.”

Why Surging Clothing Prices Won't Drive U.S. Inflation for Long

The clothing price surge was also reflected in apparel sales, which climbed 1.2 percent in January from the prior month. Those figures, released separately Wednesday by the Commerce Department, were part of an otherwise bleak report showing sales fell in seven of 13 major retail categories, amounting to a weak start to first-quarter consumer spending. 

Coming months may help shed more light on whether retail results, which aren’t adjusted for price changes, are getting propped up by firmer inflation or by growth in household demand. It’ll also provide fodder for the ongoing debate on the impending demise of traditional retailers.

In recent years, clothing and accessories brands have been retreating from department stores and outlet locations in an effort to reduce markdowns. Consumers became accustomed to heavy promotions as retailers slashed prices to attract more shoppers. Now such labels as Ralph Lauren and Kate Spade are trying to wean customers off discounts and return to full-price options. 

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