Eat Out to Help Drive Inflation Down
Wednesday 23rd September 2020
After a successful drive to ‘Eat Out to Help Out’ by Rishi Sunak, the Chancellor of the Exchequer, UK inflation has dropped to a five-year low. The Treasury has already announced that the 130,000 claims to date have been worth £522 million, with claims still to be made until the end of September.
Due to restaurants charging 50% off food and soft drinks up to the value of £10 per person, the UK’s inflation rate fell to 0.2% in August, following on from 1% in July. Prices in restaurants and cafes themselves were 2.6% lower than in August 2019, therefore making price changes negative for the first time since records began in 1989, according to the Office for National Statistics.
Inflation is a general increase in prices and fall in the purchasing power of money. Inflation is measured using the CPI (Consumer Price Index) and takes into account the basket of goods. This refers to a fixed set of goods and services which represent the UK consumer population at any one time. The Bank of England has been set a target of 2.0% for inflation by the Government - this way inflation is controlled, stimulating the economy at a steady rate, whilst not in overdrive and skyrocketing prices and reducing purchasing power. However, currently the rate of inflation is at 0.2%.
When inflation is low, it is beneficial to consumers as the prices of goods and services are increasing at a minimal rate that is rarely felt due to wages rising simultaneously. However, inflation has still outstripped growth in pay, so cumulatively, it has not made the British public better off.
The reason for the Bank of England wanting to limit inflation is not just for the purpose of people saving less and spending more, but it is to increase the purchasing power of money in order to restimulate the economy.
The base interest rate of the Bank of England is currently at 0.1%. This way, it makes borrowing cheaper, and saving less worthwhile due to the very limited returns. By making borrowing cheaper due to reduced interest, this results in a stimulation in the economy as people are more willing to borrow in order to spend in the economy. People are therefore more reluctant to save as letting money sit in their bank accounts reaps minimal benefits.
Another way the Bank of England can stimulate the economy is through quantitative easing (QE). QE is essentially an injection of money into the economy. However, it is not as simple as just ‘printing money’. QE has the Bank of England creating digital money which is then used to buy things like government debt e.g. bonds/gilts. These are essentially asset purchases. This way, money is injected into the economy to boost spending and investment, thereby stimulating the economy. During the global recession of 2008, the Bank Rate was lowered from 5% to 0.5% to aid in the economic recovery. As discussed earlier, driving down interest rates makes it cheaper to borrow money. However, QE is necessary when low interest rates can go no further.
Back in June, the Bank of England increased their QE spending by £100bn. This, along with the VAT reduction to 5% until January 2021 (for certain sectors), and the Government’s Eat Out to Help Out scheme, for example, have all helped in restimulating the UK economy to fight against the impacts of COVID-19.
See https://www.bbc.co.uk/news/uk-54173658 for more information on the decrease in inflation, or visit the Bank of England’s website for more information on interest rates and quantitative easing.
