Why low inflation is worrying sign of UK’s poor economic health | Business

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Britain has often had a problem with inflation. But far from the old enemy of past decades, when galloping price increases served as a pernicious tax on the poorest households, today inflation is worryingly low.

The annual rate fell in November to just 0.3%, among the lowest levels since 1989. During the coronavirus pandemic, lower prices will have been gladly welcomed by hard-pressed consumers. But the low inflation rate also reflects a difficult period for the UK economy, and for retailers in particular.

Most of the decline was due to the falling clothes prices, which came as shoppers stayed away from the high street while coronavirus infections climbed and renewed government restrictions came into force. With the second nationwide lockdown in England, retailers were left with more stock than they can sell at usual prices – leading to steep discounting.

Clothing prices usually follow a clear seasonal pattern. Rising at the start of the year, then falling from May and through the summer, as retailers prepare for autumn product ranges. From late August and early September, prices then tend to rise until further sales in December.

However, Covid-19 has severely disrupted this usual pattern. There was intense discounting recorded in March and April during the first lockdown. Now retailers have been left with stock backlogs and dwindling customer numbers for a second time.

The spreading of Black Friday discounting across the whole month of November also had an impact. Although online spending has boomed this year, it still accounts for only a third of total retail sales in the UK. Spending has increased most on food, drink and household products. But with people working from home and few opportunities to socialise, clothing sales have suffered.

Against this backdrop, high street retailers are under intense pressure to cut their prices to bolster sales. But many are also cutting jobs and closing stores to stay afloat too. Analysts believe the failure of several big high street names further dragged down the inflation rate, as shops destined for closure flogged off everything that was left. This is likely to happen again in December, after the failure of Debenhams led its website to crash, as consumers rushed to buy 70%-off fire sale bargains.

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The big concern is this low period of inflation may not last, but for all the wrong reasons.

As the end of the Brexit transition period looms, an exit from the EU without a trade deal on 31 December could trigger a sharp fall in the pound and disruption at Britain’s ports. With large volumes of goods sold in the UK sourced from overseas, prices may soon be on a rapid upward trajectory.

Far from signalling strength in the economy, such a boom in inflation would again underscore Britain’s problems.

Hafta Ichi
Source: The Guardian
Keyword: Why low inflation is worrying sign of UK’s poor economic health | Business

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