The giant global garment industry heaved a sigh of relief overnight, as the cotton price eased back slightly from the all-time peak of $1.90 a pound it reached last Friday. All the same, with cotton prices more than doubling over the past 12 months, clothing manufacturers and retailers are worried that they’ll soon have to start marking up price tags.

The surge in cotton prices started last August, after heavy rains affected major cotton producers, such as China, the US, Australia and Pakistan, and disrupted global supplies. At the same time, India — the world’s second largest cotton growing nation — introduced restrictions on cotton exports.

The price of synthetic fabrics, such as rayon, has also risen sharply, as manufacturers have sought cheaper alternatives to cotton, or used more blended fabrics.

Rising production costs in China have exacerbated the problems of the clothing industry. For the past decade, multinational companies have been able to manufacture clothing cheaply in China. But many Chinese factories scaled back their output during the financial crisis, and are now having to pay higher wages to attract workers as they ramp up production to meet higher global demand.

Some clothing retailers have already lifted prices to reflect higher raw material and labour costs. But more are likely to do so in coming months as the effect of surging cotton prices comes through the pipeline. Cotton in garments that are presently being sold in stores was harvested about six months ago and cotton prices have soared by around 30 per cent since the start of 2011.

Last December, Mike Parker, the head of giant sporting clothing and footwear group, Nike Inc, warned that profit margins were likely to come under pressure in coming months, as a result of rising cotton prices, as well as higher labour and transportation costs.

“As supply and demand find a new normal in the recovering economy, our industry is going to experience margin pressure due to rising input costs,” he predicted.

With US unemployment levels high, and consumers wary of opening their wallets, it’s extremely difficult for clothing manufacturers, and retailers to pass on their higher costs in full.

In a recent interview, Mike Duke, the boss of retailing giant Wal-Mart, said “there’s no doubt there may be some price increases that come up, but we don’t want to ever let that be the first answer … that just because cotton prices are up, that we’re automatically going to pass that on to consumers.”

Of course, those in the rag trade aren’t the only ones feeling their margins being pinched as a result of higher raw material costs.

The latest profit season in the US has seen evidence of margin squeeze at a number of major consumer companies, including Procter & Gamble and Kraft Foods, due to higher raw material costs.

And many analysts believe this margin squeeze is the biggest reason for distrusting the latest US sharemarket euphoria.

*This article was originally published on Business Spectator