Diane Coyle: We can all be Victoria Beckham now:

It is hard to imagine the distinguished figure of the Governor of the Bank of England browsing in the supermarket aisles, rather than the upmarket gentlemen's outfitters on Jermyn Street, but it seems Mervyn King has an eye for a bargain when it comes to buying clothes from his local Tesco or Asda. Or so, at least, the latest Bank of England Inflation Report hints. I've found that the other guests at dinner parties tend to glaze over when I tell them the Inflation Report is a fascinating document, but so it is. One gem this time is a box on falling clothing prices in the UK.

It is hard to imagine the distinguished figure of the Governor of the Bank of England browsing in the supermarket aisles, rather than the upmarket gentlemen's outfitters on Jermyn Street, but it seems Mervyn King has an eye for a bargain when it comes to buying clothes from his local Tesco or Asda. Or so, at least, the latest Bank of England Inflation Report hints. I've found that the other guests at dinner parties tend to glaze over when I tell them the Inflation Report is a fascinating document, but so it is. One gem this time is a box on falling clothing prices in the UK.

The cost to consumers of clothing and footwear, relative to other goods, has been declining for a good 20 years. But this trend has accelerated since the mid 1990s. In absolute terms, the price of clothing and footwear has fallen by almost 6 per cent in the past 12 months alone (while the consumer price index has risen by just over 1 per cent over the same period).

We're all familiar with this as consumers and you don't have to be a fashion victim to appreciate how much better off we are as a result. Even if you believe we don't need as many clothes as we buy (although personally I don't think you can have too many pairs of shoes), a decent shirt has become a reasonable impulse purchase, and we can keep our children in shoes that fit without making a big dent in the family budget for a new pair, as parents used to have to in the 1970s.

What is the explanation for this cornucopia of clothing? The obvious answer is the globalisation of the industry. The major economies have speeded up the liberalisation of trade in textiles, traditionally a protected industry, since they agreed to phase out import quotas starting in 1995. Any remaining quotas will be gone by the end of this year.

As a result, their own domestic production has declined (by more in Europe than in the US) and production in leading emerging markets such as China and Turkey has increased. But not just these two. Check the labels in the garments you buy, and the range of source countries is huge, from Brazil to Lithuania via Mauritius and Bangladesh. Still, China is a big producer, and its share of world trade in clothing has risen by 50 per cent in less than 10 years.

Clothing production is relatively labour intensive, these emerging economies have lower labour costs than ours, and the comparative advantage in trade has been working its magic. They gain the export earnings and jobs, we gain as consumers. The losers are the less efficient domestic producers put out of business by imports, together with their employees - although having grown up in a Lancashire mill town in the 1960s and 1970s, I'm not too nostalgic about those old factory jobs.

The effect of cheaper imports on prices seems obvious, but it is not the whole story. Even if clothing imports have become much less expensive, there must have been a mechanism to pass on the savings to consumers rather than padding profit margins along the distribution channels.

So there are two more elements accounting for our bargains. One, as the Bank reports, is a sharp rise in productivity in the shrinking UK clothing industry. The explanation is probably that the least efficient manufacturers have been going out of business, while the ones that remain have become more productive - kept on their toes by stiff competition from imports. The businesses we have left will be niche manufacturers, but superbly competitive ones.

More important still has been competition in distribution and retailing. The number of small wholesalers in the sector seems to have been declining. Retail rivalry in clothing is fierce (ask Stuart Rose at Marks & Spencer), and some of the new competition comes from the big supermarket chains with access to global-scale distribution networks.

There is evidence of the importance of competition in the fact that consumers in other developed countries have not necessarily enjoyed the benefits of global efficiencies in production and cheaper clothing imports. In contrast to the UK, according to data from Eurostat, clothing prices in the rest of the EU have risen by 0.6 per cent in the latest 12 months (although still making a downward contribution to an overall inflation rate of 2.1 per cent).

This is good news for those of us who shop in the UK's malls and high streets, for there is every sign that competitive pressure is continuing to force retailers to improve their supply chain and logistics. Asda's parent, Wal-Mart, is, after all, the poster child of the US economy: a 2001 report from McKinsey found that it alone could account for much of the gain in American productivity since 1995.

Like all successful businesses now, even retailers of clothes and shoes are finding that a lot of their competitive advantage lies in their IT systems, which organise ordering and deliveries. So consumers, it does compute - there is no excuse for not having a nice outfit to wear at this year's Christmas parties.

Deficit-happy Bush would be wise to heed Europe's warnings

It doesn't take a lot of imagination to figure out how President George Bush or John Snow, his Treasury Secretary, will react to the chorus of European complaints about the US deficit and weak dollar.

Nicolas Sarkozy, the French Finance Minister and presidential hopeful, has urged the US to act now to cut its budget and current account deficits. His comments echoed those of Jean-Claude Trichet, president of the European Central Bank, who described the dollar's fall - and the euro's corresponding rise - as "brutal". And Italy's Economy Minister was the first to go public with a call for G7 intervention on exchange rates.

When they start to move in one direction or another as decisively as the dollar has done this year, currencies always overdo it. The markets are thundering with the sound of a stampede as traders conclude they have a nice one-way bet here for the time being.

There is little doubt the US currency has further to fall. How much further is a harder question, but it would be wrong to conclude it is tumbling into a bottomless pit.

The dollar has already moved substantially. Under Mr Bush, it has lost about a fifth of its value (in trade-weighted terms). A depreciating exchange rate is exactly what you'd expect when a country has an unsustainably large current account deficit. The US has had an external deficit for two decades, which sounds long enough to be sustainable. But unfortunately, the shortfall of exports compared to imports has been accelerating, setting new records each month, and the IMF predicts it will be equivalent to 5.5 per cent of US GDP this year.

One popular argument among the hairiest of dollar bears goes that the inflows of capital from Asia - which were allowing the US to finance its appetite for consuming more foreign goods than it can pay for with export earnings - are drying up. Some figures from the Federal Reserve lend weight to this, and if it is a trend, the potential for further dollar depreciation is large indeed.

On the other hand, US interest rates are on an upward path, after a long period below rates in other major currency areas. If the weaker currency itself feeds into import prices and the inflation pipeline, the extent of US rate increases in the months ahead may well surprise markets.

Then there is the intervention argument. The dollar is close to the trough it reached in April 1995, the last time there was a substantial international agreement to reverse a major currency trend. Americans will have little patience with Euro-whingeing, but if the dollar continues to fall, they might start to think about intervention themselves.

diane@enlightenmenteconomics.com

Hamish McRae is away.