The UK Government's Eat Out to Help Out scheme is behind the "sharp drop" in inflation in August to the lowest level since 2015, with investors warned to expect inflation to remain volatile and "under pressure" as consumer demand slows heading into Autumn.
Derrick Dunne, chief executive of Beaufort Investment, said: "The UK is now at risk of near-term negative inflation, albeit likely temporarily, after a very sharp drop in inflation in August which left CPI at just 0.2%."
He called the Government's Eat Out to Help Out scheme the "decisive factor", accounting for 0.44 percentage points of the decline from July's Consumer Prices Index (CPI) reading of 1%.
"The official CPIH figure showed the same impact, with inflation falling to 0.5%, from 1.1% the previous month, as numerous sectors showed a slump in activity," Dunne added.
Adrian Lowcock, head of personal investing at Willis Owen, agreed that the inflation drop in August was largely driven by the Eat Out to Help Out scheme, but added that with the country still recovering from lockdown the figures are likely to be subject to revision.
"While the collapse from July's figures looks extreme, savers and investors must not fixate on the figures as inflation is likely to be very volatile in the near term, reflecting the disruption caused by the government's response to Covid-19," he said.
The latest inflation data has been published as the Bank of England prepares to meet tomorrow (17 September).
Sandra Holdsworth, head of global rates UK at Aegon Asset Management, forecast some short-term bounce back in prices as schemes like Eat Out to Help Out end.
"However, consumer demand is expected to weaken into the Autumn as the furlough scheme ends, unemployment rises and with confidence among both businesses and consumers likely to remain low," she warned.
"We can expect to see prices in many sectors remain under pressure and inflation rates remain close to 0% for some time."
Holdsworth added that this had placed pressure on the Bank of England to "act in some way", although the central bank's options are limited.
Helal Miah, investment research analyst at The Share Centre, said it was "an important week" for the UK economy, following jobs data published yesterday (15 September) which showed unemployment beginning to rise.
"Inflation is not set to pose a problem for the Bank of England when they meet tomorrow and decide that they will not do anything - however, the data we have had recently and yet to come will no doubt challenge the central bank to provide further stimulus," he said.
"What we are seeing from the economic data is that the inevitable short-term recovery is over. Subsequent data will now begin to truly reflect the health of the economy, as the pent-up demand from consumers fades, confidence levels drop as unemployment rises and the challenges presented by lockdowns and restrictions on gatherings and movement continue - as well as the threat of a ‘No Deal' on Brexit."
But Miah said investors should not be "put off" equities, adding that "the best time to invest in equities is when there is plenty of gloom around, positioning investors for longer term returns".
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