Since 2021, consumer prices have consistently risen faster than expected. The pandemic and the war in Ukraine caused extensive disruptions to commodity markets and have worsened an inflationary swell caused by labour shortages, snarled supply chains, and exacerbated the pre-existing strains from the pandemic on the global economy. From the European Union (EU) to the United States (US), Consumer Price Index (CPI) is trending upward and paying more for everything has become a reality. The increase in energy prices over the past two years has been the largest since the 1973 oil crisis whilst the price increases for food commodities and fertilisers have been the largest since 2008. The World Bank report on Commodity Markets Outlook has warned that the global economy will witness the largest commodity price shock since the 1970s. Energy prices are expected to rise more than 50 per cent in 2022, reflecting an 81 per cent increase in coal prices, a 74 per cent rise in natural gas prices, and a 42 per cent increase in the price of oil, while non-energy prices including agriculture goods and metals may rise almost 20 per cent in the current year, the report predicts.1
In the last two years, businesses in the textile, automobile, energy, and heavy machinery sectors are facing a sharp rise in input materials such as steel, aluminium, copper, coal, semiconductors, petroleum products, etc. Inflation has not spared even FMCG companies as the rise in edible oil, food grain and other food ingredient prices have increased thereby affecting their profitability. Companies and retailers selling discretionary products such as apparel, electronics, liquor, and footwear said they will increase prices to cope with rising raw material and supply chain prices, although it could impact demand for some products. Consumers feel the squeeze, with less disposable income to spend.
Higher food and energy prices, supply constraints in many sectors, and a rebalancing of demand-supply services have driven up headline inflation in most economies. Meanwhile, underlying inflation has also increased, as reflected in different gauges of core inflation, especially in advanced economies. In response to soaring prices, central banks of major advanced economies have been pushed to tighten policy rates significantly.
According to IMF, global growth is expected to slow sharply from 5.7 per cent in 2021 to 2.9 per cent in 2022 as Russia’s invasion of Ukraine has significantly disrupted economic activities and trade, leading to high commodity prices, adding to supply disruptions, raising food insecurity and poverty and exacerbating inflation.
The US recorded 9.1 per cent inflation in June 2022, the highest since November 1981, spurring the Federal Reserve to plan a series of aggressive interest rate hikes to bring prices back to a reasonable level. This CPI spike is led by energy and food prices, which are largely fuelled by the Russia-Ukraine crisis. Prices continue to mount for domestic goods and services, from shipping charges to automobiles to apparel. The energy index rose 7.5 per cent month-on-month (MoM) and rose 41.6 per cent year-on-year (YoY), the largest 12-month increase since April 1980. The gasoline index rose 11.2 per cent and the food index increased 10.4 per cent YoY, the largest 12-month increase since February 1981. The apparel index rose 0.8 per cent in June, following a 0.7 per cent increase in May. Meanwhile, the core CPI, which excludes food and energy prices increased 5.9 per cent, compared with the 5.7 per cent estimate.
The US central bank has announced the most aggressive interest rate increase in nearly 30 years and promised more action to come to combat the price surge. The Federal Reserve increased interest rates by 0.75 percentage points in June, and in July the Fed again hiked interest rates by 0.75 percentage points for the second consecutive time to fight inflation. The World Bank is concerned that interest rate hikes in the US could drag down the world economy.
In the United States, economic activity lost momentum in the first half of 2022, due to the hit from the Omicron wave, tougher financing conditions, and the fiscal effects of the Russia-Ukraine war. War has limited trade and financial linkages thereby heightening inflationary pressures, which have already been more noticeable than in other advanced economies. The World Bank has lowered the GDP outlook for US by 1.4 percentage points to 2.3 per cent.
In India, the consumer price inflation rate hit a five-month high and consecutively breached the Reserve Bank of India’s upper limit of 6 per cent in the last six months and reached 7.01 per cent in June 2022. This relentless rise in inflation will prompt RBI to tighten monetary policy and thereby increase borrowing costs for trade and industry.
The Wholesale Price Index (WPI) in June 2022 was 15.18 per cent, up from 12.07 per cent in June 2021. The high rate of inflation in June 2022 was primarily due to the rise in prices of mineral oils, food articles (14.39 per cent), fuel and power (40.38 per cent) and manufactured products (9.19 per cent) as compared to the corresponding month of the previous year. Despite the cut in excise duty on petrol and diesel announced in late May, the fuel and power rate of inflation rose by 0.65 per cent MoM to 155.4 in June from 154.4 in May. Manufactured textiles and clothing items’ rate of inflation stood at 14.57 per cent and 3.90 per cent respectively.2
The International Monetary Fund has slashed India’s growth outlook for the financial year 2022-23 to 7.4 per cent from the 8.2 per cent forecast in April saying that the revision reflects mainly less favourable external conditions and a surge in domestic prices. In April, the IMF had slashed the growth projection from the earlier 9 per cent, citing higher commodity prices.
China’s annual inflation rate was at 2.5 per cent in June 2022, up from 2.1 per cent in May 2022. This was the highest point since July 2020, with food prices rising the most in 21 months as consumption strengthened further following an improvement in the COVID-19 situation (2.9 per cent). China has set a target of CPI at around 3 per cent for this year, the same as in 2021.
The prices of gasoline and diesel continued the upward trend with YoY growth of 33.4 per cent and 36.3 per cent, respectively, while airfare surged by 28.1 per cent from a year ago. Food and non-food items prices rose 2.9 per cent and 2.5 per cent respectively YoY. Transportation and communication had the largest driving effect on CPI, reflecting the broader impact of the Ukraine war. Meanwhile, the producer price index (PPI), which measures the prices for products as they leave factories, fell to 6.1 per cent in June 2022 from 6.4 per cent in May, the lowest in 15 months but above expectations of 6.0 per cent. The slower rise in the PPI was driven by the reopening of industries, stable supply chains in key sectors, and government policies to stabilise commodity prices.
The core CPI in June rose by 1.0 per cent YoY, and an increase of 0.1 percentage point over the previous month. This reflects that real demand is improving as the COVID-19 outbreak is brought under control. However, in the structural changes of consumer prices, the influence of cyclical changes in pork prices and fluctuations in international energy prices are gradually being felt. The price of pork has affected the CPI by dragging down the 0.34 per cent point in May to 0.08 per cent in June.
Japan’s inflation hit 2.4 per cent in June 2022, slightly down from 2.5 per cent in May, still low by global standards. The core CPI, which excludes fresh food but includes energy, rose 2.2 per cent YoY in June, according to figures released by the Bank of Japan. Japan’s annual core consumer inflation surpassed the bank’s target of 2 per cent for the third straight month in June and has intensified pressure on the country’s fragile economy from soaring global raw material costs, thereby increasing imports costs. Japan is poor in resources and the problem became noticeably worse after Russia invaded Ukraine in February and Western nations imposed steep sanctions on Moscow, sending food and fuel prices soaring.
The Bank of Japan raised its core consumer inflation forecast for the current fiscal year ending in March 2023 to 2.3 per cent from 1.9 per cent and kept its low-interest rates in place even though many of its global counterparts have increased their interest rate to subside inflationary pressures. The low-interest rate has resulted in the yen hitting a 24-year low as well. Rising fuel and food prices and a weak yen that inflates the cost of imports are expected to keep Japan’s core consumer inflation above the BOJ’s 2 per cent target for most of this year.
Prices for food and clothes grew 3.7 per cent and 1.1 per cent YoY respectively, while fuel, light and water charges grew by 14.0 per cent YoY. The core-core CPI, which strips away both volatile food and fuel costs, was up 1.0 per cent YoY in June, marking the sharpest rise since February 2016.
Euro area annual inflation was 8.9 per cent in July 2022, up from 8.6 per cent in June 2022. It was initially driven by post-pandemic supply bottlenecks but the fall-out of the Russia-Ukraine conflict has been the main reason behind increased energy, metals and food prices. While high energy prices remain a major inflationary factor, processed food and services prices have also surged, suggesting that inflation is becoming increasingly broad.
As per Eurostat data, inflation in July was driven largely by the energy sector with 39.7 per cent growth while the food, alcohol and tobacco sector grew 9.8 per cent. Prices in the non-energy industrial goods sector grew 4.5 per cent and the services sector grew 3.7 per cent.
Core inflation, which gives a better idea of consumers’ actual purchasing power and strips out volatile food and fuel prices, accelerated to 4.0 per cent in July from 3.7 per cent in June, twice the European Central Bank’s 2 per cent target. The highest annual rates were recorded in Estonia (22.7 per cent), Lithuania (20.8 per cent) and Latvia (21 per cent), while Malta (6.5 per cent), France (6.8 per cent) and Finland (7.9 per cent) recorded the lowest rate of inflation. In Germany, the inflation rose to 8.5 per cent on a yearly basis, in Netherlands’ prices rose by 6.8 per cent, and in Italy prices grew at an 8.4 per cent rate. Russia’s invasion of Ukraine has fuelled inflationary pressure, driven by post-pandemic supply shocks and soaring energy prices, affecting everything from food and services to everyday goods in Europe.
However, at the July meeting, the ECB raised interest rates by 50 basis points, the first increase since 2011, to make sure inflation returns to its 2 per cent target over the medium term. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50 per cent, 0.75 per cent and 0.00 per cent respectively, with effect from July 27, 2022.3 The central bank had initially committed to a 25 basis points rate hike in the June meeting, but inflationary pressures continued trending upward and policymakers considered it appropriate to take a larger first step.
World Bank estimated Eurozone’s growth to slow to 2.5 per cent in 2022, as additional supply shortages caused by the Russia-Ukraine crisis weigh on economic activity in Euro Area. World Bank projected growth to moderate further to an average of 1.9 per cent in 2023-24, as the ECB tightens monetary policy and lingering repercussions of the war will continue to disrupt economic activity.
Among all the countries in the world, Turkey had by far the highest inflation rate in the first half of the year. In June 2022, Turkey’s inflation rate reached 78.62 per cent, the highest rate in 24 years, and it is on course to keep breaking records. Meanwhile, the domestic PPI increased to 138.31 per cent YoY in June 2022 from 132.16 per cent in May.
Turkey has experienced high inflation for years, but it shot up in late 2021 as the government pursued unorthodox economic policies, such as cutting interest rates rather than raising them. Despite high inflation, the central bank cut the interest rates by five percentage points between September 2021 and January 2022 and gradually reduced to 14 per cent last fall and has remained unchanged since. The lira fell 44 per cent against the dollar last year and is down 21 per cent against the dollar since the start of this year.
The main components of the CPI in June were transportation with 123.37 per cent, food and non-alcoholic beverages with 93.93 per cent and furnishings and household equipment with 81.14 per cent, while communication with 23.74 per cent, clothing and footwear with 26.99 per cent, and education with 27.76 per cent were the other main groups where low annual increases were realised.4
The country has recorded a high growth rate for many years. The Turkish government has been stressing a new economic model that would boost exports by keeping its currency lira, at low levels, further fuelling inflation due to rising import costs. The inflation rise has decimated the living standard of the Turkish people.
The UK’s CPI hit a 40-year high and rose by 9.4 per cent in June 2022, up from 9.1 per cent in May. Rising prices for motor fuels and food made the largest upward contributions to the change in the CPI in June. The annual increase for transport was 15.2 per cent and this sharp YoY rate of price increase in transport was mainly caused by a 42.3 per cent rise in the price of motor fuels this year. This is the highest rate since January 1989. Average petrol prices stood at 184.0 pence per litre in June 2022, compared with 129.7 pence per litre a year earlier, whilst the average price of diesel in June 2022 was 192.4 pence per litre. Meanwhile, the producer input prices rose by 24.0 per cent in June 2022, up from 22.4 per cent in May 2022; this is the highest rate that has been recorded since January 1985.
Food and non-alcoholic beverage prices have risen by 9.8 per cent in June 2022, up from 8.7 per cent in May, and the highest rate since March 2009. The annual rate for clothing and footwear was 6.1 per cent in June 2022, down from 6.9 per cent in May. Prices normally fall at this time of year as the summer sales season begins, but there was little movement in 2022 and, in 2021, prices were still rising following the end of the coronavirus lockdown.5
Effect of inflation on the textile and apparel industry:
The global fashion industry was set for a complete recovery in 2022 as COVID-19-induced supply and demand constraints were finally easing, but now shoppers will have to reconcile themselves with the price surge. Prices of textiles, like many other raw materials, are soaring on resurgent post-pandemic demand and the rocketing cost of both energy and transport. Cotton, linen, silk and wool, as well as synthetic materials derived from petroleum, saw surging prices in recent months.
Reduced consumer spending: A recent survey by US consultancy firm First Insight, Inc on 1,000 US citizens showed that the consumers’ shopping habits have changed in response to rising prices, with 42 per cent saying that they are now shopping for deals—such as sales or shopping the clearance racks. Forty per cent are now staying within a budget, 28 per cent say they are buying less overall, 25 per cent are shopping more online, and 25 per cent are shopping in bulk stores or using warehouse retailers. To cope with rising prices, 31 per cent of consumers say that they will reduce their spending on fashion products. The retail sales of clothing and clothing accessories in the United States totalled $25.76 billion in June 2022, slightly lower than that in May and April, according to the US Census Bureau.6
High input costs: An increase in input cost means more expensive yarns, textiles, and apparel. The price of cotton fibre has risen recently while the price of polyester fibre has also grown noticeably since 2021. Due to the increase in cotton prices, polyester fibre demand has increased but input costs have been impacted by rising crude oil prices due to the Russia-Ukraine war. Companies are left with low-profit margins as they cannot pass this cost burden onto their customers in the short run. The small industries are impacted more than the large manufacturers or factories as they have less scope to absorb these shocks.
Exporters and importers are facing rising cost pressure because of an increase in shipping costs as well. On average, global container shipping charges have more than quadrupled since 2019, and deliveries are delayed. The textile industry may increase spending on research to bring out new products based on man-made fibre and thereby reduce dependence on cotton. This challenging period can be transformed into an opportunity if they advance and transform the entire textile value chain by shifting to man-made fibre.
Alternative fibres: Brands are now turning to alternative fibres to combat hovering cotton prices. ‘Recycled cotton’ yarn is gaining the manufacturers’ interest as recycled cotton is made from waste and leftover pieces, and often mixed with another fibre, like polyester, providing good quality and comfort. The recycled cotton yarn is already dyed, hence there is no need to dye it once again. In this process, no extra chemical process or extra water wash is required. A lot of time and money is saved when recycled cotton yarn is used. For instance, textile innovation company, Evrnu has launched NuCycl r-lyocell, the world’s first high-performance, fully recyclable material made entirely from cotton waste. Evrnu is sourcing discarded cotton to create better fibres that can replace up to 90 per cent of common textile materials.
Similarly, Consortium leader Infinited Fiber Company (IFC) is producing its Infinna recycled fibre from waste materials. Adidas and H&M has partnered with IFC and are launching new products using the fibre in their autumn/winter 2022 collections. The project is set for three years and aims to collect and sort end-of-life textiles, using pioneering Infinited Fiber technology and regenerate them into a new man-made cellulosic fibre called Infinna, which looks and feels just like virgin cotton. Similarly, Lenzing has reported that sales of its Tencel Luxe speciality lyocell filament yarn grew five times in 2021 and the company is currently expanding production capacity by 25 per cent to accommodate the growing demand.
Meanwhile, Primark has partnered with recycled cotton producer Recover and will become the first high-street retailer to use Recover’s unique RColorBlend fibre on a global scale with the launch of a new leisurewear range—a combination of recycled cotton from textile waste and low-impact dyed recycled polyester, removing the need for garment dye. The partnership supports Primark’s care strategy, to increase the amount of clothing containing recycled materials and fosters its ambition to make fashion sustainable and affordable for all.
Inflation is currently high in most economies around the globe. Major factors contributing to higher prices today include the war in Ukraine, chronic supply chain disruptions, and lingering pandemic effects. Most consumers have less confidence to spend today because of inflation, with an even greater number searching for less expensive ways to shop in response to rising prices. Companies must invest in research and development work to get an immediate system to understand consumers’ spending behaviour and how it is going to change over the period. Consumers are shopping more during sales now, looking for deals and discounts, and are staying within a budget and buying less overall. By utilising predictive analytics, retailers and brands can be prepared for uncertain economic conditions. By combining historical data with machine learning, smarter decisions can be made, optimising inventory, purchasing, and effective pricing.
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