Inflation fell to just 0.2 per cent in August – the lowest level since 2016 – after the government’s ‘Eat Out to Help Out’ scheme contributed to a large month-on-month fall in prices, according to the Office for National Statistics.
The year-on-year consumer prices index (CPI) rate of inflation fell from 1 per cent in July due to the impact of the ‘Eat Out to Help Out’ scheme – designed to help the coronavirus-struck hospitality sector after the UK-wide lockdown was lifted.
Source: ONS
Inflation in the restaurant and hotels sector fell from 1.8 per cent in July to -2.8 per cent in August. It wasn’t the only sector to see a significant fall in prices, with downward contributions from airfares and clothing.
Source: ONS
Sandra Holdsworth, head of global rates – UK at Aegon Asset Management, said that the impact of schemes such as ‘Eat Out to Help Out’ will likely be short term in nature and there will be a bounce-back in prices as they come to an end. 
Nevertheless, Holdsworth said there are other reasons why inflation could stay low in the months ahead.
She said: “Consumer demand is expected to weaken into the autumn as the furlough scheme ends, unemployment rises and with confidence among both businesses and consumers likely to remain low.
“We can expect to see prices in many sectors remain under pressure and inflation rates remain close to 0 per cent for some time.”
Holdsworth (pictured) continued: “This, of course, puts pressure on the Bank of England to act in some way, but with interest rates close to zero already, the options are limited unless it starts to countenance seriously the prospect of negative interest rates.”
Indeed, negative rates could be a possibility in the near term, according to Beaufort Investments’ Derrick Dunne.
He said: “Investors now face a quandary, how long can they discount the impact of inflation which, left unchecked, can be one of the biggest detriments to long-term wealth creation?
“They certainly seem to have some breathing room in the near-term, although it is unlikely a deflationary spiral would be allowed to take hold, especially given the unprecedented stimulus that has been thrown at the crisis.”
Nevertheless, increased talk of deflation makes it difficult to predict what might happen next in markets, according to Rachel Winter, associate investment director at Killik & Co.
“We’ve recently seen a rise in Covid-19 cases, not only in the UK but across Europe,” she said. “Local lockdowns are becoming more common alongside the imminent end to the furlough scheme, resulting in fear of mass job losses.
“We’re listening closely to rumours around the autumn budget, which should shed some light on how the government plans to cover the cost of the pandemic while supporting those in and out of work.”
Winter continued: “Sterling will also play a role in future inflation-rate movements. Our currency has weakened recently due to concerns about the lack of progress in the latest round of Brexit negotiations.
“As the UK is a net importer, a weaker pound could make imports more expensive and push inflation upwards.”