Chancellor Rishi Sunak’s £500m-plus discount dining scheme for struggling pubs and restaurants has driven inflation to its lowest level for nearly five years.
The Eat Out to Help Out (EOTHO) scheme’s 50pc off meals and soft drinks up to £10 per person pushed the Consumer Prices Index benchmark down from 1pc in July to 0.2pc last month, the weakest since December 2015.
More than 100 million meals were eaten under the August scheme, costing the taxpayer £522m. The discounts knocked 0.44 percentage points off the Office for National Statistics’ inflation benchmark that includes housing costs, while the Chancellor’s VAT cut for hospitality until January also weighed on prices.
The combined effect pushed restaurant and hotel prices down 2.8pc - the first year-on-year fall since figures began in 1989.
Inflation was also dragged lower by falling air fares in an aviation sector hammered by plummeting demand for air travel.
Fares typically soar between July and August due to summer holidays - rising 22pc last year - but fell 1pc last month. A smaller rise in clothing prices also weighed on CPI.
But the fall in inflation was less severe than expected by economists, who had pencilled in CPI of just 0.1pc. The Bank of England, which targets 2pc inflation, predicted the CPI could hit an all-time low of -0.3pc in its latest Monetary Policy Report.
The figures showed some pockets of inflationary pressure as reopening businesses passed on post-Covid costs to customers. Many hairdressers have introduced surcharges for protective wear in their pricing, pushing annual cost inflation up to 4.9pc in August - the highest for 15 years.
The cost of consoles and games has also risen since the lockdown, while inflation will bounce back automatically thanks to the effects of the end of the EOTHO discount, pushing the CPI higher again in September.
But the Bank of England is unlikely to lose much sleep over an inflation revival as downward risks predominate in what promises to be a difficult autumn for the economy.
Unemployment is now creeping higher in the latest figures while the end of the furlough in October threatens a surge in joblessness. More than 3m workers are still supported by the scheme.
The dampening effect on consumers has fuelled expectations that the Monetary Policy Committee will pump more stimulus into the economy in November, potentially adding £100bn to its existing £745bn quantitative easing programme.
Financial markets are also pricing in further cuts to interest rates despite borrowing costs standing at an all-time low of 0.1pc. Threadneedle Street is currently reviewing its monetary policy tools – including a possible move to negative rates – while Governor Andrew Bailey has said the central bank is “not out of firepower by any means”.
Jing Teow, economist at PwC, said: "A weaker recovery, driven by lower consumer demand, could lead to a prolonged situation of low price growth, putting more pressure on the Bank of England to further ease monetary policy by cutting rates further, perhaps below zero.”
Other downward pressures on prices include an £84 fall in the energy price cap on standard variable tariffs from October.
Thomas Pugh, economist at Capital Economics, warned it "will be a few years” before the economy is strong enough to push inflation to 2pc.
Philip Shaw, chief economist at Investec, added that the jobs pain ahead was also likely to overshadow the potentially inflationary impact of a lower pound – pushing up import costs – if the UK ends the post Brexit transition period without a trade deal with the European Union.
He said: “The most important influence will be where the Bank thinks inflation will be in two to three years’ time, not next month or the month after. The outlook is subdued, and the labour market is the major factor.”