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UK inflation accelerated after the Eat Out to Help Out scheme

Watch: What is inflation and why is it important?

UK inflation accelerated in September, as the wind-down of the government’s subsidised meal scheme and a surge in demand for second-hand cars pushed up prices.

The headline rate of inflation on the consumer price index (CPI), which tracks to cost of everyday goods and services, came in at 0.5% in September, 0.1 percentage point lower than predicted by analysts.

It marked a jump on the 0.2% change in prices seen in August, and was also higher than the 0.3% forecast by the Bank of England’s monetary policy committee (MPC). The latest inflation figures were published by the Office for National Statistics on Wednesday.

Analysts said much of the rise reflected prices returning closer to ‘normal’ after the end of the government’s Eat Out to Help Out scheme, which cut dine-in meal prices Monday to Wednesday in August.

The ONS said: “Consumer behaviour responded to Eat Out to Help Out (EOHO) with a higher proportion of restaurant transactions than usual at the beginning of the week, during August 2020.”

But Samuel Tombs, chief economist at Pantheon Macroeconomics, noted some restaurants continued self-funded meal discounts in September to keep up customer numbers.

Diners have lunch outside a restaurant in Didsbury, as the 'Eat Out to Help Out' scheme continues, amid the coronavirus disease (COVID-19) outbreak, in Manchester, Britain, August 10, 2020.  REUTERS/Jason Cairnduff
The 'Eat Out to Help Out' scheme cut prices in August. Photo: Jason Cairnduff/Reuters

Hospitality firms have also been handed VAT cuts until next year that could limit price growth, though Tombs said the signs were that firms “generally have pocketed most of the windfall” rather than pass it on to customers.

READ MORE: UK retail footfall slides as remote working and 10pm curfew hit shopping

Other rising prices last month included transport, with average costs rising for the first time since March. “Prices have potentially been boosted by increased demand as people, reportedly, look to reduce their reliance on public transport,” said the ONS. Air fares also declined at a lower pace than in recent months.

Meanwhile prices fell in September for furniture, household equipment and maintenance, games, toys, and food and non-alcoholic drinks.

Tombs wrote in a note before the latest figures were published that price growth across the economy in the near-future was likely to remain subdued. He predicted the headline rate of inflation would not exceed 1% until the second quarter of next year, with COVID-19 continuing to weigh on the economy.

Price growth for food is likely to come close to zero soon, as both producer and import prices have declined this year, according to the economist.

Watch: Will the Covid crisis lead to higher taxes?

Such low inflation, significantly below the Bank of England’s 2% target, gives “strong grounds for the MPC to sign off more quantitative easing before the end of the year.”

But Deutsche Bank economist Sanjay Raja noted the end of Britain’s Brexit transition period would put upward pressure on prices from the end of the year, echoing similar warnings by retailers.

“Deal or no deal, price rises are inevitable,” he wrote in a note on Monday. “A drop in FX alongside non-tariff barriers (and possibly tariffs in a no-deal Brexit scenario) will push up inflation, particularly for core goods, food, alcohol and tobacco.”

Deutsche Bank analysts expect CPI to reach 1.7% year-on-year in 2021, and the retail price index (RPI), another inflation measure to reach 2.6%. “The trough in inflation is now behind us.”