Inflation at a 5-year low

UK Inflation rate fell to 0.2% in August, down from 1% in July. This decline can be attributed to the Eat Out to Help Out scheme, due to the discounted meals and VAT cuts. Meals were discounted 50% up to £10, and VAT was cut from 20% to 5%, introduced on food, drinks, accommodation and certain entertainment.

Inflation tends to pick up in the summer, and August is usually the peak month of the holiday season, so this inflation decline was unprecedented.

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Inflation will stay low, and could potentially decline further, as consumers still are not going out, and the VAT cut lasts until 2021 at least. The furlough scheme also ends soon, so consumers will have fewer savings overall, so will spend less. Furthermore, as consumers shift from physical to online shopping, inflation will continue to decline as prices are low due to lower costs.

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Inflation will pick back up as the BoE continue their QE and other stimuli. Additionally, the government may continue their furlough scheme further, and thus consumer savings will stay robust. Lastly, oil prices will continue to rise as the economy reverts back to normal, which will also increase inflation.

Sources:

https://www.bbc.co.uk/news/uk-54173658

https://www.ft.com/content/3684b696-9c31-491e-be0e-6232a2a6d13d