Outlook: Retailing gloom

AS THE Christmas lights start to twinkle, shoppers are merrily queueing to pay outrageous prices for cappuccinos, fancy candles and designer clothes. Also selling like hot cakes are all the goodies of the new economy - mobile telephones, iMacs, personal organisers and computer games.

Elsewhere on the high street, however, the picture is one of unremitting gloom. The majority of retailers have not found the formula that will persuade consumers to part with more money. Goods such as consumer electronics and clothes are seeing dramatic price deflation.

At the same time the cost of materials used by manufacturers is rising at its fastest rate in four years according to the latest survey from the Chartered Institute of Purchasing and Supply. This accounts for a third of manufacturers' total costs. The jobs market is tight too, so increases in wages - which account for the other two thirds of costs - are running well ahead of inflation.

There is no sign yet of this bulge at the far end of the inflation pipeline working its way along to the prices we pay on the high street, where pricing power has rarely been weaker. That means that somewhere in between there is a squeeze on profit margins - either the stores themselves or their suppliers.

In the stock market we can already see the casualties of this phenomenon. Food and clothing manufacturers are suffering alongside struggling retailers. Everyone is finding it hard to make money, a situation more readily associated with a recession than the near boom we now enjoy.

In part this is down to past over-expansion by retailers. Too much capacity equals a consumers' paradise and reinforces the trend among shoppers towards bargain hunting. Overall, the growth of total retail sales, which is the economically significant indicator, has been very healthy. But growth in like-for-like sales has been less buoyant.

Normally, this overcapacity would eventually work its way out of the system. What's different this time round is the new competitive challenge of the Internet and e-commerce. There will always be a place on the high street for those with the innovative and attractive formula, but for commodity retailers, the outlook continues to look bleak indeed.