Next said it expected to post profits of between £535 million and £560 million in this financial year.

Next, one of the UK’s leading fashion chains, warned yesterday prices may rise by as much as eight per cent next year due to higher costs and January’s VAT hike.

It said factors such as rising cotton prices meant it expected to experience input cost inflation in the first half of 2011.

It will attempt to mitigate some of the effects but said the impact of the cost hikes combined with a new VAT rate of 20 per cent from January will result in a rise in clothing retail prices in the spring of next year.

“We have yet to purchase the majority of our spring-summer ranges, but we estimate that selling prices may rise between five and eight per cent,” the company said.

In a trading update, Next said there had been a noticeable cooling in retail demand in recent months, with the mood among consumers seen as cautious.

“We believe that consumer spending will be more restrained in the second half than in the first, as spending cuts and tax rises begin to take effect.”

It is budgeting for like-for-like retail sales to be between 1.5 per cent and 4.5 per cent lower in the second half of the year, compared with a drop of 1.5 per cent in the first half.

While high street sales have been towards the lower end of its previous guidance, the Next Directory home shopping business has produced a better-than-expected performance after a 7.8 per cent rise in first half sales.

Next said it expected to post profits of between £535 million and £560 million in this financial year, which would represent an increase on the previous year of between six and 11 per cent.