Inflation is how we measure the price of our goods and services, and the UK’s inflation rate tracks how much prices are rising or falling. The rate was at 1% in July but fell by a significant margin to 0.2% in August – the lowest that it has been in five years. But what does that actually mean?
- Low inflation is typically great for consumers, as it means that the prices you’re paying when out at the shops or eating in restaurants is going to be lower.
- It’s also good for borrowers, as it means that banks and lenders will likely charge you less for using credit.
- Lower inflation can also lead to banks setting lower interest rates for savers, which isn’t great news. Data shows that people are managing to save more money at the moment, but it’s difficult to take advantage of with the low-interest savings accounts currently on the market.
Economists haven’t had to look far to find the reasons for this dramatic drop. Prices seem to have been skewed by the Eat Out to Help Out scheme, which saw tens of millions of people claim heavily discounted meals throughout the month. It seems that the results may have been disproportionately affected by prices in restaurants and cafes: the office of national statistics (ONS), who track our inflation rate, said that these fell by 2.6% when compared to August last year and reached a negative figure for the first time since 1989.
The cut in VAT will also be having an impact. The government cut VAT for certain types of goods and services, and many high-profile companies are choosing to pass this on to their consumers by lowering prices. The aim is to encourage people to spend money through good deals, at a time when businesses are struggling and many people are still very cautious about going out.
Restaurant prices weren’t the only thing to fall in August – costs also went down for clothing, footwear and air travel. ONS deputy national statistician, Jonathan Athow, commented on the changes:
“The cost of dining out fell significantly in August thanks to the Eat Out to Help Out scheme and VAT cut, leading to one of the largest falls in the annual inflation rate in recent years. For the first time since records began, air fares fell in August as fewer people travelled abroad on holiday. Meanwhile, the usual clothing price rises seen at this time of year, as autumn ranges hit the shops, also failed to materialise.”
The big question now is how all this will affect businesses in the long term. While low inflation means that they are technically charging less for their products, that might not matter if it means that more people are actively shopping and using services. Now that the Eat Out to Help Out scheme has ended and tighter social distancing measures are coming back into play, businesses will need to do what they can to sustain consumer interest and keep profits healthy over the winter.