A hefty drop in restaurant prices, spurred by Britain’s scheme to support the hospitality sector through the COVID-19 pandemic, helped to push inflation down last month to its lowest rate in almost five years.

Consumer prices rose by 0.2% in annual terms in August, the smallest increase since December 2015 and a sharp slowdown from July’s 1.0% increase, the Office for National Statistics (ONS) said on Wednesday.

A Reuters poll of economists had pointed to a reading of 0.0%.

Discounts for more than 100 million meals were claimed via the government’s “Eat Out to Help Out” programme, which offered diners a state-funded price reduction of up to 10 pounds ($12.89) between Mondays and Wednesdays in August.

Prices in restaurants and cafes were down 2.6% compared with August last year, their first fall since records began in 1989.

While this prompted an unusually large fall in the rate of inflation, the shock of the coronavirus pandemic on the economy and a coming surge in unemployment look likely to keep consumer prices in check.

A cut in value-added sales tax in the hospitality sector - another part of the government’s emergency plans - plus falls in air fares and a smaller-than-usual rise in clothes prices also helped to push annual inflation down.

“While we expect an initial bounce-back in inflation in September, as the ‘Eat Out to Help Out’ scheme comes to an end, overall inflation is likely to remain well below the Bank of England’s (BoE) target for some time,” said Yael Selfin, chief economist at KPMG.

The consumer price index has now been below the BoE’s target for 13 months in a row.

Most economists polled by Reuters think sharply rising unemployment and a slowing recovery will prompt the BoE to pump more stimulus into the economy before the end of this year.

The ONS said eight items in the inflation basket were still unavailable to its price collectors, reflecting things that remain off-limits, such as tickets to the theatre, soccer matches and horse racing, and catering for more than 50 people.

In April, during the most stringent period of the lockdown, 90 items had been unavailable.

There were already signs that inflation pressure would remain weak.

Factory output prices fell for the fifth month in a row in annual terms - the longest such run in four years - as weaker oil prices pushed them down by 0.9%.

Excluding oil and other volatile components, core factory output prices showed no change in annual terms, their weakest showing in nearly five years.

Separate data provided official confirmation of a surge in the housing market as the economy reopened in June.

Average British house prices jumped 3.4% in the year to June to reach a new record high of 238,000 pounds.

More timely surveys have suggested the upswing has continued through to this month but industry officials have warned the mini-boom could turn into a bust before long, given the state of the economy.

Meanwhile, A deepening dollar selloff propped up the British pound on Wednesday, putting it on track for its biggest daily rise in 2-1/2 weeks before a central bank meeting on Thursday where policymakers may strike a downbeat assessment for the struggling economy.

The greenback fell broadly against its rivals as bets grew the US Federal Reserve might hint at more policy action at the conclusion of a meeting.

Markets are keen to see the Fed’s economic projections, and particularly whether it spells out where it sees inflation headed and what exactly that means for interest rates.

“Major currencies are up against the dollar including the pound with the oil price rise also helping,” said Kenneth Broux, a strategist at Societe Generale in London. “It seems to be risk on into the Fed.”

Leaving aside the pre-Fed policy decision bounce, the odds are stacked in favour of further pound weakness.

While the Bank of England is widely expected to hold fire, policymakers are likely to conclude that downside risks to the economy are rising for the economy due to rising Brexit uncertainty and renewed restrictions on social activity.

Geoffrey Yu, senior EMEA market strategist at BNY Mellon said the central bank will now have to contend with Brexit and fiscal uncertainty and the pound’s recent spell of weakness is warranted.

Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.

After throwing Brexit trade talks into disarray by proposing legislation that would break international law by breaching parts of the Withdrawal Agreement, Prime Minister Boris Johnson faces a rebellion from his own lawmakers as the proposed bill, called the Internal Markets Bill, moves through parliament this week.

The pound rebounded 0.5% to $1.2954, moving away from a late July low of $1.2768 hit last week. Against the euro, the pound edged 0.24% higher at 91.67 pence.

Economic concerns also weighed after Tuesday’s data showed Britain’s unemployment rate rising for the first time since the coronavirus lockdown began in March.

That prompted investors to ratchet up expectations that the pound is likely to remain volatile in the coming weeks with one-month volatility gauges trading higher than their one-year counterpart on Wednesday.

Reuters