updated 4/16/2008 8:22:31 PM ET 2008-04-17T00:22:31

Clothing prices dropped in March as retailers continued heavy markdowns to move merchandise, the latest indicator of a tough economic environment that shows no signs of easing.

On Wednesday, the Labor Department said overall consumer prices rose by 0.3 percent in March, while clothing prices fell by 1.3 percent, the biggest one-month drop since September 1998.

The news came after retailers reported the weakest March sales in 13 years last week. Consumers, pressured by a weak economy, cool temperatures and rising food and gas prices, limited their shopping to essentials.

Apparel retailers have been marking down clothing for the past several months in an effort to move winter merchandise and make room for spring apparel. The drop in March signals spring and summer attire sales continue to be sluggish.

"Retailers are pushing the panic button," said Burt P. Flickinger III, managing director of Strategic Resource Group, a consumer industry consulting firm in New York. "If you have a bad March, which is typically the best month between New Years Day and Memorial Day, you're going to have a really bad year at retail."

In addition, there is a lack of "must have" clothing trends, which has also hurt apparel retailers, said Chris Donnelly, a partner in the retail practice at consulting group Accenture.

"It's a combination of a lack of trends driving sales and broader economic conditions making a continued challenging environment for retailers over the past couple of months," he said.

Last week, apparel retailers including J.C. Penney Co., Gap Inc. and Limited Brands Inc. reported sharp drops in same-store sales, or sales in stores open at least one year, a key measure of a retailer's fiscal health.

The drop comes at a particularly difficult time for apparel retailers, who are facing rising costs of cotton, packaging, transportation and heating and cooling for their stores.

Flickinger expects clothing prices will start to rise "significantly" between April and August to combat the rising costs. That might inhibit consumer spending on apparel even further, he said.

Combined with other factors such as the lowest saving rate U.S. history, a high level of consumer debt, low consumer confidence and rising mortgage delinquencies, Flickinger expects a retail slowdown to last into next year.

"Consumers are browsing," Flickinger said. "When they're seeing these deep discounts they'll buy, but that's still not enough to get stores to produce positive sales."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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