Line chart of Annual % change on consumer price index showing UK inflation slows

Dine-out scheme helped drive sharp fall in UK inflation

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 to 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.

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. 

Analysts largely expect the BoE to remain in “wait and see” mode at its September meeting on Thursday. However, James Smith, economist at ING, said that with depressed activity, millions of people on furlough and subdued inflation, action at the November meeting was “looking ever-more-likely”.

The eurozone fell into deflation last month, with prices down 0.2 per cent, compared with inflation of 0.4 per cent the previous month, as the pandemic hit demand and energy prices.