Restaurants, hotels and transport had the largest effect on the inflation figure, according to the Office for National Statistics (ONS), which reported CPI inflation at a lowly 0.2 per cent for August.
It said restaurants and hotel groups pulled the figure down and led to a -2.8 per cent rate in the 12-month inflation rate. This is the first time that the 12-month rate has been negative since it started recording the figures in 1989.
And the ONS said the data reflected the effect of the Eat Out to Help Out Scheme, offering diners on any Monday to Wednesday in August up to 50 per cent of their meals (maximum £10 discount).
It added that the reduction in VAT in the hospitality sector from 20 per cent to five per cent also contributed to the fall in prices.
Turning to transport, the downward drag from motor fuels and air fares was partially offset by an upward contribution from the purchase of vehicles.
Inflation, including owner occupiers’ housing costs (CPIH) was 0.5 per cent in August, down from 1.1 per cent in July.
Target two per cent inflation unlikely within next few years
Thomas Pugh, UK economist at Capital Economics, said the sharp drop in CPI inflation from one per cent in July to 0.2 per cent in August probably represents the low point for inflation. But a sustained rise to the Bank of England’s two per cent target seems unlikely within the next few years.
Pugh said: “The slump in inflation in August was broad based but the biggest impact came from the effects of the cut in the VAT rate for hospitality/tourism and August’s “Eat Out to Help Out” restaurant discount scheme.
“What’s more, delayed summer clothing sales, which normally occur in July, meant that inflation in the clothing and footwear sector fell from -0.1 per cent in July to -1.4 per cent in August. Recreation and culture was the only sector to register an increase in inflation from +2.6 per cent in July to +2.8 per cent in August. As a result, overall core inflation measure (ex. food, energy and tobacco) fell from +1.8 per cent to +0.9 per cent.
He added that some of these movements should be reversed over the coming months.
“The EOHO scheme ended in August, and although some restaurants have kept the discount going by themselves, many won’t have. And the VAT cut for the hospitality industry will expire on 12 January. Meanwhile, the drag on inflation from the previous collapse in the oil price will continue to fade. But the big picture is that it will be a few years before the economy is strong enough to sustain CPI inflation at the two per cent target. The big risk to this view is a no deal Brexit, which could cause a slump in the pound and, in turn, a temporary sharp rise in inflation to above +3.5 per cent,” he added.