Black Friday effect lowers inflation

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Inflation dropped in November thanks to a Black Friday effect, with increased discounting by retailers pushing down the cost of clothing and footwear. Of course, Black Friday occurs every year, but this time around discounts were particularly steep in clothing sales, which led to an unseasonal fall in prices. That highlights the continued pressure on the retail sector, and while price cuts on the shelves are good for consumers, they don’t bode well for profits.

We shouldn’t set too much store by one month’s inflation figure, particularly this time around when a second national lockdown meant the statisticians weren’t able to collect all of the usual data. However, the broader picture remains one of low inflation and that spells low interest rates for the foreseeable. We can expect inflation to tick up next spring, when the basis for comparison moves into the post-pandemic era and the big drop in fuel prices falls out of the equation in March, but that won’t be enough to persuade the Bank of England to tighten monetary policy.

There are some economists who believe that the Bank’s money printing programme will let the inflation genie out of the bottle further on down the line. The central bank has plenty of room to tighten monetary policy to rein inflation back in, but that is still a nightmarish scenario because it would mean the Bank raising interest rates while the economy was still struggling to get to its feet.

In the short term, a disorderly Brexit could be inflationary because it means a weaker pound and higher tariffs on imported goods. But that’s the kind of inflation the Bank of England will look through, as a one-off blip with no lasting power.

Runaway inflation is a risk worth keeping an eye on, both domestically and internationally, but it is one that has failed to come home to roost throughout the last decade of ultra-loose monetary policy. That’s because there are also deflationary forces at work in the global economy, most notably technological advances and ageing populations in developed nations.

On top of that, the economic damage of the pandemic means that many businesses won’t want to deter valuable customers by raising prices for some time to come. The government will also likely repair some of the hole in its finances through higher taxation, which will restrain consumers’ tolerance for price rises and in a highly digitalised marketplace, it’s easy to find a cheaper product to trade down to.

Perhaps there will come a point when inflation does rear its head and cause central banks to pivot their policy. But for the time being low interest rates and loose monetary policy look like the only game in town.

Read the latest data from the ONS

These articles are for information purposes only and are not a personal recommendation or advice.


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Written by:
Laith Khalaf

Laith Khalaf is Finanial Analyst at AJ Bell. He began his financial services career in 2001 at Hargreaves Lansdown, where he worked a variety of roles across pensions and investments, covering both DIY and advised business. Laith began to focus on research and investments in 2007, becoming a leading industry commentator. He’s provided daily business bulletins on LBC, is a regular contributor to the financial pages of the national press, and a frequent guest on TV and radio. He has a degree in Philosophy from Cambridge University.