Next chief executive Simon Wolfson has warned that cost-price inflation is likely to hit fashion retailers by early next year.

Wolfson said: “It will hit retail and particularly fashion retail in the first or second quarter of next year. Retailers cannot afford to take it into their margins.”

He said that, although he was very cautious and expected no let-up in the downturn next year, the next few years would not be a complete wipeout for retail. “This is not Armageddon, or disaster even, and it won’t be this tough forever,” he said.

Wolfson explained that Next’s pricing strategy would be to try “smart” trading on certain products and not impose blanket increases. He said it would also relocate some sourcing to northern China to offset inflationary pressures from the Far East of about 10 per cent.

Numis analyst Andrew Wade said that cost increases could go up by as much as 15 per cent. “Almost everyone we are speaking to says that they will have to put their prices up, which in a soft trading environment is not a recipe for success,” he said.

On Wednesday, Next delivered the first of the much-anticipated group of City updates that provide a barometer of how deeply the credit crunch is eating into retail sales and profits.

In the six months to the end of July, Next’s pre-tax profits fell 12.4 per cent to£173.5 million, largely in line with city expectations, with retail like-for-likes down 6 per cent. Sales for the period fell 0.2 per cent to£186 million.

Sales at Next’s Directory business, which includes its catalogue and online operations, continued apace, up 2.2 per cent.

The retailer also revealed its latest ad campaign, which features a brief cameo from singer Danni Minogue. Wolfson said that although its TV ads, which it has been running for the past year, have not increased sales directly, they have helped shift brand perception, changing its image from not just “safe and reliable” to also having a strong fashion offer.