InvestmentsSep 16 2020

Inflation drops to lowest rate since 2015

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Inflation drops to lowest rate since 2015

Inflation fell to its lowest rate since 2015 in August, driven by the Eat Out to Help Out scheme, VAT cuts and falling air fares.

Figures from the Office for National Statistics showed inflation slipped to 0.2 per cent for the month of August, down from 1 per cent in July.

This is the lowest rate of inflation since December 2015 and well below the Bank of England’s 2 per cent target.

Falling prices in restaurants and cafes, primarily due to the Eat Out to Help Out scheme, had the largest downward impact while air fares and clothing prices also failed to rise at the standard amount.

The scheme offered half price meals at most restaurants and cafes from Monday to Wednesday, while VAT was slashed from 20 to 5 per cent on food, accommodation and attractions.

The largest upward contributions came from games, toys and hobbies, accommodation services and second-hand cars.

Jonathan Athow, deputy national statistician for economic statistics, said: “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.

“For the first time since records began, air fares fell in August as fewer people travelled abroad on holiday. Meanwhile the usual clothing price risings seen at this time of year, as autumn ranges hit the shops, also failed to materialise.”

The decline edges the inflation rate further away from the Bank’s 2 per cent target after three months of upward growth, even to 1 per cent in July, following the initial coronavirus shock.

But the news has failed to rock UK markets, with the FTSE 100 flat since opening and the FTSE 250 down less than half a percent (0.3 per cent).

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “100 million heavily discounted meals in August have taken a huge bite out of the inflation figures. Restaurant prices were actually lower than the same time last year – which is the first time this has happened for more than 30 years.

“This looks like good news for savers, who don’t have to work terribly hard to ensure their savings grow faster than inflation.

“But don’t be lulled into a false sense of security. Inflation looks backwards, and fixed rate accounts are fixed for the future, so what really matters is what happens next. And in the future, inflation is likely to stage something of a comeback.”

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