Weaker Clothing Prices Check Fed Push to Lift Inflation: EconomyMichelle Jamrisko and Ilan Kolet
When it comes to clothing, Americans don’t need their mamas to tell them they better shop around.
And as shoppers take advantage of heavy discounts, prices have been kept lean -- setting a limit on the acceleration in inflation that Federal Reserve policy makers are trying to achieve.
Apparel costs have played a disproportionate role in holding back price increases over the last two years. Core inflation, which excludes volatile food and energy costs, decelerated to a 1.2 percent year-over-year pace in March from 2 percent in March 2012, as measured by the Fed’s preferred inflation gauge. Clothing, which makes up just 3.5 percent of the index, accounted for about a fifth of the slowdown.
Helping keep a lid on prices are savvy shoppers empowered by online price-comparison tools and the rise of e-commerce. That’s adding to competitive pressures that drive apparel suppliers to seek ever-cheaper labor overseas. Imports now account for about 98 percent of the U.S. clothing market, according to data from the American Apparel & Footwear Association.
“Clothing has become, for the consumer at least, one of the great bargains -- and it’s going to stay a bargain,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor, who has been following apparel trends for more than 20 years.
Imported clothing prices have proven a reliable six-month leading indicator of the apparel measure in the Fed’s favored gauge, the personal consumption expenditures price index. Clothing imports are still showing no inflation -- a sign prices will remain subdued.
The PCE’s gauge of clothing and footwear prices has been dropping for most of the last two decades, a decline that coincides with a falloff in U.S. production of apparel. Since 1995, domestic clothing output has plunged 83 percent, economists at Banco Bilbao Vizcaya Argentaria SA in Houston estimate.
Globalization, Michigan’s Gordon said, was “a big rock thrown in the lake and for a long time the ripples have been propagating.”
Low wages and sweatshop working conditions in countries such as Bangladesh are among those consequences as U.S. companies demand “ever cheaper sources of product,” said Dorothy Lakner, an analyst at Topeka Capital Markets Inc. in New York, who has covered the industry for three decades. A fire in a Bangladesh workshop that was producing clothes for companies including Wal-Mart Stores Inc. killed 112 workers in 2012. Less than a year later, 1,129 perished in the collapse of an eight-story complex that housed apparel factories.
When wages rise in traditionally lower-cost labor environments such as China, production migrates to cheaper alternatives including Vietnam or sub-Saharan Africa, said Alan Tonelson, research fellow at the U.S. Business and Industry Council, which represents about 2,000 domestic manufacturers.
“We can forget about inflation in the garment sector for decades,” he said.
Weaker apparel prices are one part of broader inflation readings that have been slow to gain traction toward the Fed’s 2 percent goal, complicating policy makers’ plans to eventually raise record-low interest rates.
Retailers are coping with an increasingly competitive environment in which U.S. consumers have adapted to rampant discounting in a slow-growth economy. Social trends and tools for comparison shopping online mean consumers aren’t willing to pay the kind of prices that would support a high-margin apparel retail environment, said Poonam Goyal, a retail analyst for Bloomberg Industries in Skillman, New Jersey.
“Now the deals are being thrown at you through e-mail and social media and so on, so you’re inundated with tons of information and tons of deals, and you’re just like, ‘Oh my God, the whole world’s on sale!’” she said. “Retailers are becoming more promotional because the customer’s just gotten used to promotions and is looking for values and discounts.”
The “treasure-hunt atmosphere,” as Goyal calls it, already has inflicted a blow on clothing store operators, who saw sales growth shrink to 4.9 percent last year for the slowest pace since a 2.3 percent contraction in 2009 at the end of the last recession, according to data from Sageworks Inc., a provider of private-company financial information.
Macy’s Inc., the second-largest U.S. department-store company, is preparing for a competitive environment and “making it a little bit more promotional this year,” Karen Hoguet, chief financial officer, said during an earnings teleconference on May 14.
The most severe hit to retailers has come from under-25 shoppers, who typically account for about 12 percent of clothing purchases, according to Bureau of Labor Statistics data. The average consumer under 25 spent 20 percent less on clothing in 2012 than two years earlier, while every other age group spent about the same amount or more.
One source of the softness: Fewer teens are working to earn spending money. The unemployment rate for 16- and 17-year-olds was 22.1 percent in April, compared with an 18.3 percent average in data back to 1948. At the same time, the increased use of social media equips teens to resist “must-have” purchases by polling friends for their opinion on an item, Gordon said.
“It’s a lot more difficult to lead teens around by the nose and tell them here’s the fashion they must have, because they instantly communicate socially with pictures,” Gordon said.
An aging population will add to the drag on clothing demand and prices. The average American’s apparel spending typically peaks between the ages of 35 and 44, the BLS data show. People 65 years and older are set to make up 16.8 percent of the U.S. population by 2020, up from 13.7 percent in 2012, according to Census Bureau data released May 6.
While low prices sound good to shoppers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. Policy makers including International Monetary Fund chief Christine Lagarde have warned that a deceleration in prices also might prompt consumers to postpone purchases in anticipation of better deals.
Fed policy makers focus on the headline PCE figure, which includes food and energy price data. That gauge, compiled by the Commerce Department, was at 1.1 percent in March and hasn’t hit 2 percent since April 2012. PCE data for April are due May 30.
Alternate inflation measures from the Labor Department show the cost of living inching higher. The consumer price index last month rose 2 percent from a year earlier, reflecting a recovery in prices that were held down last April by government budget cuts known as sequestration.
“By any measure we have considered, recent inflation trends suggest inflation is likely to remain low in coming quarters,” economists at the Cleveland Fed wrote in an April 21 note, citing forecaster surveys and models of recent price patterns.
Investors see similarly muted growth in prices. The five-year breakeven rate, a market gauge of inflation expectations over the next five years based on trading in inflation-linked Treasuries, remains below 2 percent and has only closed above that threshold on five days in the past year.
“Inflation has been quite low even as the economy has continued to expand,” Fed Chair Janet Yellen told the congressional Joint Economic Committee on May 7. Persistent below-target inflation “could pose risks to economic performance,” she said.