Press release

16 Sep 2020 London, GB

Consumer Price Inflation down to 0.2% in August as impact felt from ‘Eat Out to Help Out’ & temporary VAT cut for hospitality sector – EY ITEM Club comments

Consumer price inflation fell back to 0.2% in August (the lowest level since January 2016) after rising to a 4-month high of 1.0% in July, up from 0.6% in June and 0.5% in May, which had been the previous low.

Press contact
Nick Cosgrove

UK&I Senior Media Relations Manager, Ernst & Young LLP

Professional services corporate communications specialist. Reluctant dog owner and long-suffering Watford fan.

Related topics Growth
  • Consumer price inflation fell back to 0.2% in August (the lowest level since January 2016) after rising to a 4-month high of 1.0% in July, up from 0.6% in June and 0.5% in May, which had been the previous low
  • Significantly reduced consumer price inflation of 0.2% in August is welcome news for consumers' purchasing power, which has recently been under pressure from falling earnings. Latest ONS data show average earnings fell 1.2% year-on-year in the three months to July. The ONS also reported that real earnings were down 1.8% year-on-year in the three months to July
  • Consumer price inflation was primarily brought down in August by the ‘Eat Out to Help Out’ scheme. There was also a downward impact from the temporary VAT cut (from 20% to 5%) for the hospitality sector
  • Air fares and clothing prices also had modest downward impacts on inflation. Core inflation dipped to 0.9% from 1.8% in July
  • August’s inflation rate of 0.2% may well prove the low point for inflation, especially as the ‘Eat Out to Help Out’ scheme has now ended (although some restaurants are extending it voluntarily)
  • The EY ITEM Club suspects inflation will hover just above 0% for the rest of 2020. Price conscious consumers, excess capacity and limited earnings are likely to limit inflation in the near term
  • There was evidence of limited price pressures further down the supply chain as producer input prices fell 5.8% year-on-year in August and 0.4% month-on-month. Producer output prices were down 0.9% year-on-year and were flat month-on-month
  • The EY Item Club expects inflation to start rising early on in 2021 as the temporary VAT cut ends in mid-January. Unfavourable base effects resulting from the significant drop in oil prices in the early months of 2020 will also have an upward impact on inflation in the early months of 2021. An expected gradual firming of the recovery will also likely have some upward impact on inflation, but it is unlikely to rise sharply and could be around 2.0% by the end of 2021
  • Despite inflation remaining below the Bank of England’s 2% target, it still looks highly unlikely that the Monetary Policy Committee will enact further stimulus after Thursday’s September meeting – a ‘wait and see’ stance on the economy is most likely

Howard Archer, chief economic advisor to the EY ITEM Club, says:

“Consumer price inflation fell back to 0.2% in August (the lowest level since January 2016) after rising to a four-month high of 1.0% in July, up from 0.6% in June and a previous low of 0.5% in May (the lowest level since June 2016). Inflation had previously trended down to 0.5% in May from a six-month high of 1.8% in January.

“At 0.2% in July, consumer price inflation was more than one percentage point below the Bank of England’s 2.0% target rate.

“Inflation was primarily brought down in August by the ‘Eat Out to Help Out’ scheme which ran throughout August. There was also a downward impact from the temporary VAT cut (from 20% to 5%) that was introduced in mid-July and will last through to 12 January 2021 for the hospitality sector, including hotel and holiday accommodation and admission to certain attractions.

“There were also modest downward impacts on inflation in August from air transport and from clothing and footwear, where the normal seasonal pattern in prices has been disrupted by the impact of COVID-19.

“Core inflation fell back to 0.9% in August after rising to 1.8% in July, from 1.4% in June and 1.2% in May (the lowest since October 2016).”

Outlook for Inflation

Howard Archer continues: “August’s inflation rate of 0.2% may well prove the low point for inflation, especially as the ‘Eat Out to Help Out’ scheme has now ended – although some restaurants are extending it voluntarily.

“The EY ITEM Club suspects inflation will hover just above 0% for the rest of 2020.

“Price conscious consumers, excess capacity and limited earnings are likely to limit inflation in the near term at least. There may also be some limited downward impact on inflation from a recent overall firming of the pound.

“While the economy is seemingly recovering well in this third quarter after its record second quarter contraction, significant uncertainties remain about the longer-term outlook and consumers look likely to be relatively cautious in their spending after the release of some pent-up demand. The near-term fundamentals for consumer spending look challenging. Many people have already lost their jobs, despite the supportive government measures, while others will be worried that they may still end up losing their job once the furlough scheme ends in October. Additionally, many incomes have been affected. Limited earnings will also have a dampening impact on inflation.

“Relatively low oil prices should also limit inflation – although the downward impact from lower fuel prices has clearly come to an end. While Brent oil rose from a near 21-year low of $15.93/barrel on 22 April to currently trading priced at around $40/barrel, it remains at a relatively low level and is still some 31% below January’s level of $65/barrel. The EY ITEM Club currently expects Brent oil to average around $44/barrel in 2020 and $52/barrel in 2021.

“There was evidence of limited price pressures further down the supply chain in August with producer input prices falling 5.8% year-on-year in August and 0.4% month-on-month. Meanwhile, producer output prices were down 0.9% year-on-year and were flat month-on-month.

“The EY ITEM Club expects inflation to start rising early on in 2021 as the temporary VAT cut ends in mid-January. Unfavourable base effects resulting from the significant drop in oil prices in the early months of 2020 will also have an upward impact on inflation in early 2021. An expected gradual firming of the recovery will also likely have some upward impact on inflation, but it is unlikely to rise sharply and could reach around 2.0% by the end of 2021.”

Bank of England in wait and see mode

Howard Archer adds: “Despite inflation remaining well below the Bank of England’s 2% target, it still looks highly unlikely that the Monetary Policy Committee will enact further stimulus on Thursday after their September meeting. A ‘wait and see’ stance is more likely.

“Nevertheless, the EY ITEM Club suspects the Bank of England will ultimately have a further role to play in building a sustainable recovery and will enact further stimulus in time. Although the economy is seemingly headed for a substantial bounce back in Q3 after its record 20.4% quarter-on-quarter Q2 contraction, there are still uncertainties. These include a potentially significant rise in unemployment, questions over the future UK-EU trade relationship, and rising COVID-19 cases.

“The EY ITEM Club believes that further Bank of England stimulus for the economy is most likely to take the form of a further dose of asset purchases – most likely at the at the November or December MPC meetings, and in the region of £100bn. This would take total asset purchases up to £845bn.

“The EY ITEM Club remains doubtful that the Bank of England will cut interest rates below 0.10%. While the Bank continues to review the case for negative interest rates, the EY ITEM Club suspects the MPC will maintain the view that such a move is not in the best interests of the UK economy.”

ONS reports difficulty in measuring inflation easing

Howard Archer comments: “The Office for National Statistics has reported that inflation has been difficult to measure in recent months due to the restrictions caused by COVID-19 – although the situation has recently improved. The ONS commented: “As the  restrictions caused by the ongoing coronavirus (COVID-19) pandemic have been eased, the number of CPIH items that were unavailable to UK consumers in August has reduced to eight; these account for 1.1% of the CPIH basket by weight and made a small downward contribution of 0.01 percentage points to the change in the CPIH 12-month rate; the number of unavailable items is down from 12 for July and a high of 90 for April; for August, we have collected a weighted total of 86.9% of comparable coverage collected previously (excluding unavailable items).””