UK inflation fell to the lowest rate in more than four years in August as discounted meals and lower taxes weighed on prices, adding pressure for the Bank of England to act later this year to stimulate the economy.
Consumer prices rose at an annual rate of 0.2 per cent in August, down from 1 per cent growth in July and the lowest rate since December 2015, the Office for National Statistics reported on Wednesday.
“The cost of dining out fell significantly in August thanks to the ‘Eat Out to Help Out’ scheme and VAT cut, leading to one of the largest falls in the annual inflation rate in recent years,” said Jonathan Athow, ONS deputy national statistician for economic statistics.
Economists polled by Reuters expected consumer prices to hold steady in August from the same month in 2019.
UK core inflation, which excludes energy, food, alcohol and tobacco, slowed to 0.9 per cent in August from 1.8 per cent in the previous month.
Prices in restaurants and hotels contracted 2.8 per cent in August, compared with the same month last year, the first annual contraction for the sector since the series began in 1989.
This reflects the effect of the government’s ‘Eat Out to Help Out’ scheme, which offered discounted meals in restaurants during August.
On July 8, the chancellor also cut the value added tax on restaurants, hotels and admission to certain attractions from 20 per cent to 5 per cent for the period between July 15 and January 12 as a way to support the hard-hit hospitality sector.
Air fares registered their first contraction since records began as fewer people travelled abroad, while the increase in clothing prices common at this time of year, “failed to materialise,” stated the ONS. Prices of clothing and footwear contracted at an annual rate of 1.4 per cent.
In contrast, prices of games, toys, hobbies and accommodation services pushed the inflation rate up.
Slow prices growth “will serve to protect households’ spending power at times when many are feeling under pressure,” said Yael Selfin, chief economist at the consultancy KPMG UK.
She argued that the end of the meals supporting scheme would result in a bounce back in the September rate, but that “overall inflation is likely to remain well below the Bank of England’s target for some time.”
Howard Archer, chief economic adviser at the consultancy EY Item Club, said despite inflation falling to just 0.2 per cent in August, it still looked “highly unlikely that the Monetary Policy Committee will enact further stimulus on Thursday after their September meeting”.
Economists expect the Bank to be on a “wait and see” mode this week.
However, James Smith, economist at ING, said that with depressed activity, millions of people on furlough, subdued inflation, increased Brexit uncertainty and rising infections, action at the November meeting was “looking ever more likely”.
Samuel Tombs, chief UK Economist at Pantheon Macroeconomics said that he expected “the headline rate of CPI inflation to average just 0.6 per cent in the last four months of 2020, persuading the MPC to sign off more asset purchases before the end of this year”.
The Bank of England had expected the prices growth rate to slow in the second half of the year reflecting the effects of the government schemes and low energy prices.
