Inflation fell to 0.2% last month as the Eat Out To Help Out scheme pushed down prices in restaurants and cafes, new figures show.
It was the lowest level of Consumer Price Index (CPI) inflation since December 2015 and a sharp drop from the 1% rate recorded in July, according to the Office for National Statistics (ONS).
Falling air fares – the first time these have been recorded in August – also contributed to the decline as did muted clothing price rises after the coronavirus lockdown altered usual seasonal fashion sales patterns.
Image: Air fares fell in August for the first time on record
Upward pressure from inflation came from computer game downloads as well as accommodation services.
The ONS figures pointed to a 2.8% year-on-year fall in prices in the restaurant and hotels sector, the first negative reading for this category since records began in 1989.
Eat Out To Help Out – the taxpayer-backed scheme which offered 50% discounts on meals – was the main reason for the decline while a VAT cut for the hospitality sector from 20% to 5% also contributed.
Government figures showed more than 100 million meals were claimed for under the chancellor Rishi Sunak’s scheme, designed to revive the sector as it reopened following the lockdown.
Jonathan Athow, ONS 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.
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“Meanwhile the usual clothing price rises seen at this time of year, as autumn ranges hit the shops, also failed to materialise.”
The 0.2% figure was higher than had been expected, with some economists forecasting a negative rate for CPI.
Thomas Pugh, UK economist at Capital Economics, said it “probably represents the low point for inflation” with the Eat Out To Help Out scheme now ended and the VAT discount set to expire in January.
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Meanwhile, the impact of the oil price collapse earlier this year – which has already been dragging on inflation – would continue to fade, he added.
However, it was likely to be a “few years” before the weakened economy is strong enough to push up demand so that CPI is sustained around the Bank of England’s 2% target, Mr Pugh said.
“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%.”