Finally, retailers are seeing some sales increases, suggesting perhaps that the worst of the modern recession is over. But let’s not get too confident: More challenges lie in wait. In particular, reports show that the prices of commodities, such as cotton, fuel, and energy, have risen an average of 7.7 percent since last year.

For retailers, higher commodity prices have strong ripple effects. Most garments contain at least some cotton, as do bedding and other soft goods. Regardless of the type of products retailers sell, they need fuel to transport those goods from the production sites to the sales outlets. These cost increases normally would lead retailers to increase their prices, so they could preserve their margins, but during this same period, consumers’ average weekly earnings have fallen 0.4 percent. That means consumers have less overall income, and raising prices are unlikely to help the situation.

Some retailers see no other option though. An apparel manufacturer that markets under brand names such as North Face, Vans, Lee, Wrangler, and Seven for all Mankind has announced it will raise prices. Aeropostale prices will increase 3 to 5 percent in the coming year—even though it lost market share over the 2010 holiday season as higher priced competitors, like Abercrombie & Fitch, offered deep price discounts. And Phillips Van Heusen, which owns Tommy Hilfiger and Izod, plans to increase prices as much as 15 percent.

As they implement these price hikes, most retailers anticipate cutting back on their inventory, to reduce any excess inventory costs. Such changes will not be missed by customers, who will face less choice and higher prices, even as they struggle to maintain their employment levels. No wonder last year’s holiday retail activity was relatively moderate. There are many forces at work, driving prices up, driving incomes down, and making it difficult overall for commerce and customers to connect.

Discussion Question: Why are retailers feeling pressure to increase prices?

Sara Murray and Elizabeth Holmes, “Sales Up, But Stores Fret Over Outlook,” The Wall Street Journal, January 15, 2011.