Fathom’s Chart of the Day 09.09.2020 – Government intervention drives lower UK inflation in August

In March, Fathom Consulting argued that the impact of the crisis on inflation was ambiguous, with the lockdowns affecting both the supply and demand sides of the economy in equal measure. That view has broadly been vindicated, with the fall in UK inflation since then largely due to short-term fluctuations in energy prices and the impact of government intervention. Indeed, it is worth noting that, after adjusting for changes in taxation, twelve-month inflation has been rising since May and is almost back to 2%.

The decline in UK headline inflation in August was largely due to the introduction of the government’s Eat Out To Help Out scheme. Since CPI is designed to reflect the prices paid by consumers, and the scheme is effectively a subsidy on private consumption, the ONS reported a substantial fall in the cost of dining out in August. Despite a relatively small weighting in the overall consumption basket (12%), heavily discounted meals knocked around 0.3 percentage points off the headline inflation rate having contributed 0.2 percentage points in July, a total swing of more than 0.5 percentage points.

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This chart is taken from Fathom’s Recovery Watch newsletter. Click here to subscribe to Recovery Watch.

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