UK inflation slowed to a near five-year low in August largely driven by subsidies provided for eating out and lower taxes, the Office for National Statistics reported Wednesday.
Inflation eased less-than-expected to 0.2 percent in August from 1 percent in July. Prices were forecast to climb 0.1 percent. But this was the lowest rate since December 2015.
Month-on-month, consumer prices dropped 0.4 percent, offsetting a 0.4 percent rise in July. Economists had forecast a 0.6 percent fall.
Due to the Eat Out to Help Out Scheme implemented by the government, charges of restaurants and cafes declined in August, providing the largest downward contribution to the annual inflation, the ONS reported.
The reduction in Value Added Tax to 5 percent from 20 percent on the hospitality sector also contributed to the fall in prices. Meanwhile, upward contributions came from games, toys and hobbies, accommodation services and road transport services.
Excluding energy, food, alcoholic beverages and tobacco, core inflation halved to 0.9 percent from 1.8 percent. This was also below economists’ forecast of 0.6 percent.
Thomas Pugh, an economist at Capital Economics, said the big picture is that it will be a few years before the economy is strong enough to sustain CPI inflation at the 2 percent target, which is a key reason why the Bank of England will eventually announce another GBP 250 billion of quantitative easing in total.
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 percent, the economist observed.
The BoE is set to announce the outcome of its monetary policy meeting on September 17. Markets widely expect the central bank to maintain status quo.
The BoE had raised its QE by GBP 100 billion at the June meeting to the current level of GBP 745 billion. The interest rate remains at a record low 0.10 percent.
Another report from the ONS showed that output prices continued to decline in August. Output prices were down 0.9 percent annually for the third straight month. Prices were expected to fall 0.7 percent.
Compared to July, output prices remained flat, while economists’ had forecast prices to grow 0.2 percent after climbing 0.3 percent in July.
Input price inflation continued to display negative growth for the seventh consecutive month in August. Input prices declined 5.8 percent annually versus a 5.7 percent decrease a month ago.
On a monthly basis, input prices slid at a pace of 0.4 percent, reversing a 1.8 percent rise in July. Economists had forecast a monthly growth of 0.3 percent. This was the first fall in four months.
In June, house prices inflation accelerated to 3.4 percent from 1.1 percent in May. The average house price was GBP 238,000 in June.
The ONS said the increase in June may reflect some degree of pent-up demand following the easing of lockdown restrictions, particularly at the higher end of the price scale.
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