Eat Out to Help Out scheme sees inflation fall to near-five year low

Eat Out to Help Out
Eat Out to Help Out - (Copyright PA Wire)
10:56am, Wed 16 Sep 2020
CBAD8A00-D2B9-4E0E-ADDF-D0366C357A34 Created with sketchtool. E9A4AA46-7DC3-48B8-9CE2-D75274FB8967 Created with sketchtool. 65CCAE04-4748-4D0F-8696-A91D8EB3E7DC Created with sketchtool.

Last month’s Eat Out to Help Out scheme and the Government’s VAT cut helped push UK inflation to its lowest level for nearly five years in August, according to official figures.

The Office for National Statistics (ONS) said the Consumer Prices Index tumbled from 1% in July to 0.2% in August – the lowest rate since December 2015.

Chancellor Rishi Sunak’s popular Eat Out to Help Out discount last month was the biggest driver in pushing down the rise in the cost of living by slashing prices in restaurants and cafes.

The ONS also said the cut to value added tax (VAT) on hospitality and tourism from 20% to 5% helped lower inflation.

It added that air fares fell in August for the first time on record as the pandemic saw more Britons holiday in the UK this summer.

UK inflation rate - (Copyright PA Graphics)

Clothes prices also fell back as retailers held off from raising prices for the usual autumn selling season, with a 0.4% rise between July and August against a 2% rise a year earlier.

Jonathan Athow, deputy national statistician at the ONS, 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,” he added.

The most recent figures from the Treasury estimated that Britons ate more than 100 million meals last month as part of the Eat Out to Help Out discount scheme.

We expect the headline rate of CPI inflation to average just 0.6% in the last four months of 2020

Diners received a state-backed 50% discount on meals and soft drinks up to £10 each between Mondays and Wednesdays in August in a bid to boost the hospitality sector after lockdown.

The ONS said CPI inflation in the restaurants and hotels sector fell by 2.6% last month, marking the first time it has been negative since records began in 1989.

While it had a one-month only impact on inflation, Samuel Tombs, at Pantheon Macroeconomics, said CPI was set to remain “comfortably below 1% in the remaining months of this year”.

He added: “Firms in the services sector likely will have to absorb higher Covid-19 related costs, rather than pass them on to consumers, in the face of lingering weakness in demand.”

The August inflation drop comes ahead of the Bank of England’s interest rates decision on Thursday, which is set to keep rates on hold at 0.1%.

But experts are pencilling in further action in the shape of more quantitative easing in November or December to help the economic recovery as government support measures come to an end.

Pay growth v inflation - (Copyright PA Graphics)

The ONS figures revealed air fares dropped by 20.6% year-on-year last month as the pandemic hit demand for overseas travel, with more countries added to the UK’s quarantine list.

Last year, air fares rose 22.4% between July and August.

The data also revealed another steep fall in fuel prices, with average petrol prices standing at 113.1 pence per litre in August against 128.3p a year earlier.

Meanwhile, the CPI including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 0.5% last month, down from 1.1% in July.

The Retail Prices Index (RPI), a separate measure of inflation, was 0.5% last month, down from 1.6% in July.

Sign up to our newsletter