Hennes & Mauritz AB posted a surprise fall in pre-tax profit yesterday as the Swedish budget fashion giant cut prices despite rising cost pressures and said markdowns would continue.

Gross margin at H&M, the world’s third-biggest clothing retailer by sales, shrank slightly more than expected to 63.2 per cent from a year-earlier 66.3 per cent.

The weak fourth-quarter results add to concerns that rising prices of raw materials such as cotton will have a significant negative impact, particularly on budget clothing chains.