Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Apparel Industry
Transcript
- Lucas: If you bought a cotton t-shirt this summer, you might have noticed the price tag went up. But not as much as you'd think, given what's happening to import costs. Luna: Right, because the headline is that import prices from China just hit their highest level since 2008. That's a huge jump. Lucas: Exactly. The data from July 17th showed that. And apparel is one of the most China-dependent categories. Roughly forty percent of all clothing sold in the U.S. comes from China. So when those costs rise, it squeezes margins across the entire industry. Luna: But we're not seeing those costs passed through one-for-one to shoppers. Why not? Lucas: Because demand is still relatively soft. Consumer confidence is shaky, and people are trading down. So retailers like Gap or Levi's can't just raise prices without losing customers. They're absorbing some of the hit, or they're squeezing suppliers. That's why you see more promotions and clearance racks. Luna: And the discount players like Ross and Burlington are cleaning up. I saw a report that their same-store sales are up seven percent year-over-year. Lucas: That's exactly the pattern. In the 1970s, when inflation was high and growth was slow, off-price retailers boomed. People still needed clothes, but they wanted bargains. The echo we're seeing now is that same trade-down behavior. Luna: How are the fast-fashion brands like H&M and Zara handling it? They're also heavily dependent on China. Lucas: They're actually in a tougher spot because their whole model is based on ultra-low prices. H&M reported a margin decline of about two percentage points last quarter. They're trying to shift sourcing to Bangladesh and Vietnam, but that takes time. And those countries have their own cost pressures. Luna: So who wins in this environment? Is it really just the discounters? Lucas: Mostly. But also premium brands that have pricing power. Think Patagonia or Lululemon. Their customers are less price-sensitive. They can raise prices and still hold margins. The middle—the mall brands—that's where the squeeze is most painful. Luna: And the numbers back that up. CPI fell slightly in June to 332.6, but core inflation is still sticky at 336.1. Meanwhile, average hourly earnings are at thirty-seven dollars and sixty cents—up, but not enough to offset the higher costs people feel at the register. Lucas: Exactly. Real wage growth is flat to negative for most workers. So they're cutting back on discretionary purchases, and apparel is often the first category to get trimmed. That's why we're seeing unit sales of clothing decline even as dollar sales hold up from price increases. Luna: There's also a tariff angle. The Trump administration just announced new global tariffs, and there's a specific generic drug tariff from 2028, but the broader trade tension is pushing more supply chain costs onto retailers. Lucas: Right. The import price surprise is partly due to those tariffs. And the Fed is watching this closely. Kevin Warsh recently highlighted three key phrases in Fed communications—the market is parsing every syllable for clues on rate cuts. But with unemployment at just four point two percent, the Fed can afford to wait. Luna: So what's the long-run effect on the apparel industry? Do we see a permanent value shift, like more people sticking with discount stores even when the economy improves? Lucas: That's what happened after the 1970s. The off-price sector grew from a niche to a major channel. Today, Ross and TJX have market caps in the tens of billions. I think the same thing is happening now. Once consumers learn they can get a decent shirt for half the price, they don't go back. Luna: And that's exactly the kind of structural change that shows up in the data. GDP growth is at two point one percent, which is healthy, but the composition of consumer spending is shifting. Lucas: Quick honest thing—a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these shows. We keep it ad-free because of that support. Luna: Yeah, it really does make a difference. If walking through the economy with us has made something click, that's the way to keep it going. Lucas: But back to apparel—I think the key question is whether this shift is temporary or structural. My bet is structural. The import cost shock is a permanent reset on the supply chain, and consumer habits are locking in. Luna: So maybe the next few years are about watching which brands adapt and which get left behind. Lucas: Exactly. And we'll keep an eye on it. Thanks for listening.