UK inflation falls to five year low due to Eat Out to Help Out

UK inflation slipped to a five-year low in August as the Eat Out to Help Out scheme dragged down prices in the restaurant sector for the first time on record.

The price of goods and services in the UK rose by 0.2 per cent in August compared to a year earlier, the Office for National Statistics (ONS) said, following a one per cent rise in July. It was the lowest reading since December 2015.

“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.

Athow said airfares also suffered the first drop on record “as fewer people travelled abroad on holiday”. Meanwhile, the usual rise in the price of clothes as autumn ranges were released “failed to materialise”.

August’s inflation figures reflected the government’s stimulus programmes and changes to the economy brought about by the coronavirus pandemic.

The Eat Out scheme offered 50 per cent off meals up to £10 in August from Monday to Wednesday. The government made up the shortfall. More than 100m cheap meals were bought through the scheme.

Prices in restaurants and hotels fell by 2.8 per cent in August as a result of the scheme. That was the first price fall the sector has seen since records began in 1989.

Falling airfares drag down UK inflation

Alongside falling airfares, prices of clothing and footwear slipped at an annual rate 1.4 per cent, the ONS said.

Jing Teow, senior economist at PwC, said travel restrictions including the UK’s quarantining system “meant that there was much lower consumer demand for air travel”.

“Other categories, such as games, toys, and hobbies, also saw an increase in prices.” Teow said that reflected higher “demand for indoor activities… over the summer”.

August’s 0.2 per cent inflation was well below the two per cent target of the Bank of England. It meets to set interest rates tomorrow.

Yet it was higher than the Bank’s August prediction of a fall to minus 0.3 per cent. And it was above economists’ expectations that prices would stay flat.

Bank of England to hold steady

Victoria Clarke, economist at Investec, said: “We do not expect any policy action tomorrow. But [we] continue to judge that, absent of a significant upside surprise on the UK’s economy course over the next two months, the MPC will opt to raise its asset buying total in November.”

Howard Archer, chief economic adviser to the EY Item Club, said he also thought the Bank would inject more stimulus in November.

He said that “the economy is seemingly headed for a substantial bounce-back in the third quarter after its record 20.4 per cent quarter-on-quarter second-quarter contraction”.

But he said that “there are still uncertainties. These include a potentially significant rise in unemployment, questions over the future UK-EU trade relationship, and rising Covid-19 cases”.