Eat out to help out scheme pulls UK inflation down; Fed holds rates – as it happened

Rolling coverage of the latest economic and financial news, as UK inflation falls to its lowest level since 2015

The Federal Reserve has also outlined why it will leave interest rates on hold for so long.

Marketwatch explains:

In a statement, the Fed said it decided to keep its policy interest rate at near zero and expects this will be appropriate until two things happen: labor market conditions return to the “maximum employment” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time.”.

There were two dissents to the Fed decision. Dallas Fed President Rob Kaplan wanted the Fed to retain greater flexibility once the economy was on track to meet its two goals. Minneapolis Fed President Neel Kashkari wanted the Fed to maintain rates close to zero until core inflation has reached 2% on a sustained basis.

Hello again. As expected, there were no major fireworks from the US Federal Reserve today.

The Fed has voted to leave interest rates at their current record lows. It’s also released new forecasts which show it expects to leave borrowing costs unchanged, near zero, through until 2024.

So, #Fed says no rate hike for three years, says it wants full employment though doesn’t say what that is, says the 2% target inflation rate is no longer the target. So much wiggle room as to be positively squishy. Is this guidance or an admission ‘crystal ball cloudy’?

Once again, the risk #markets got what they wanted from the @FederalReserve–yet more uber dovish forward guidance.

Looks like it may have been an interesting meeting as 2 #FOMC members dissented.

For background on the why/so what of the Fed’s decision:https://t.co/WAeA0iopcO

*FED LEAVES RATES NEAR ZERO, FORECASTS SHOW ON HOLD THROUGH 2023

see u guys in 3 years

This implication is what you should be focusing on. The Fed is locking real rates at -2% despite substantial improvement in the economy. The Fed is begging you to buy risk assets. https://t.co/7aukIivRhc

Time for a recap….

Related: Boeing ‘gambled with public safety’ in run-up to two deadly crashes

The US stock market has opened at little higher, as investors take a cautious position ahead of the Federal Reserve meeting tonight.

The Dow Jones industrial average has risen by 50 points to 28,045, while the tech-focused Nasdaq is 0.4% higher.

Newsflash: The UK government has extended its support to protect struggling businesses from being evicted from their premises.

With Covid-19 still hurting many firms, the government has decided that commercial tenants, such as restaurateurs and retailers, should be protected from being evicted from their premises by landlords until the end of the year, even if they can’t meet their rental payments.

I am announcing today that we are extending support to protect those businesses that are unable to pay their rent from eviction to the end of the year. This will stop businesses going under and protect jobs over the coming months.

This government is committed to supporting businesses and our high streets at this difficult time, and this extension of support will help businesses recover from the impacts of the pandemic and plan for the future.

Government extends support to stop business evictions this yearhttps://t.co/UimcCo3FyB

Aerospace manufacturer Boeing has been severely criticised by a Congressional investigation into two fatal 737 Max crashes.

The report, published today, accuses Boeing of cutting corners and hiding design flaws, as my colleague Jasper Jolly explains:

Boeing jeopardised the safety of passengers by cutting costs on the development of the 737 Max and escaped scrutiny from regulators before software flaws contributed to two fatal crashes of the aircraft, according to a report by US politicians.

The US manufacturer was forced to ground its bestselling plane after the crashes of a Lion Air 737 Max in 2018 and an Ethiopian Airlines jet in 2019. The crashes killed 346 people.

Related: Boeing ‘gambled with public safety’ in run-up to two deadly crashes

The latest US retail spending figures are out….and they’re weaker than expected.

US retail sales rose by 0.6% in August, shy of predictions for a 1.0% jump. July’s sales figures have been revised down to, from 1.2% to 0.9%.

US retail sales rise by +0.6% MoM in August, less than exp. +1.0%. Another disappointing figure which is pushing the euro-dollar exchange rate towards 1.1900@graemewearden

US retail sales advanced 0.6%m/m in August vs 1.0% exp (prior 0.9%). Annual pace a little firmer at 2.6% from 2.4%. pic.twitter.com/X4WP2mw6dz

Retail Sales increased 0.6% in August https://t.co/yQRYNCOlOf Retail sales increased 0.6 percent from July to August (seasonally adjusted), and sales were up 2.6 percent from August 2019.

The increase in August was below expectations, and sales in July were revised down. pic.twitter.com/s6NFVEhfVp

Just in: Supermarket chain Waitrose is closing four more supermarkets, a move that could cost 124 jobs.

Waitrose, whose costs have jumped during the pandemic, says it couldn’t make the quarter profitable, as my colleague Sarah Butler explains:

Waitrose is to close another four of its 335 supermarkets as the staff-owned group prepares for an overhaul under new management.

Stores in Caldicot, Ipswich Corn Exchange and Shrewsbury will close, putting 124 jobs at risk. Another 140 roles in Wolverhampton will transfer to Tesco, which is taking over the site.

Waitrose to close four more supermarkets, putting 124 jobs at risk https://t.co/P8Uk8A3h0i

The recent stock market recovery has been partly lifted by hopes of a Covid-19 vaccine, and better treatments for the virus.

So investors should note that US pharmaceuticals group Eli Lilly and Company has reported encouraging test results.

#News: We are pleased to share data from our Phase 2 trial of a neutralizing antibody in the #COVID19 outpatient setting. Read more: https://t.co/DmeWSci6W6 pic.twitter.com/HFg72XUzH4

UK businessman-turned-philanthropist John Caudwell argues that the slide in UK inflation bolsters the case for a huge government stimulus package:

Inflation is now at a five-year low at 0.2%. It will remain low for years. This is one of the three reasons that, uniquely in my lifetime, make it affordable to borrow up to £1 trillion to invest wisely in the UK economy. #CaudwellPandemicRecovery #CPR https://t.co/FfnHvku3gs pic.twitter.com/9uE6BKimLa

The Covid-19 pandemic has also swelled the eurozone’s trade surpus.

The gap between what euro area countries sell overseas, and what they buy in, jumped to €27.9bn in July, up from €23.2bn a year ago. That’s because eurozone imports slumped by 14.3% compared with a year earlier, while exports only dropped 10.4%.

Euro area trade in goods surplus €27.9 bn in July; €25.8 bn surplus for EU https://t.co/1vjYuQ4Tw9 pic.twitter.com/M3Ogej1Nm6

Deflationary forces are intensifying in the UK, following the slump in inflation last month to a near five-year low, warns Christopher Dembik, Head of Macro Analysis at Saxo Bank.

He says it’s a serious worry, given the problems building across the UK economy:

The direct consequence of low-flation is that it adds pressure for the Bank of England to widen its support to the economy as the risks of hard Brexit or thin deal (which is currently our best-case scenario) are looming.

In July, the official UK CPI figures surprised on the upside with the biggest driver being a strong rise in fuel prices (petrol and diesel) following a significant increase in demand as the UK and many other countries began to reopen their economies. In August, the UK CPI is down again, confirming that deflationary forces are intensifying in most countries in the wake of the pandemic. The CPI is down to 0.2%, which is the lowest level since the end of 2015, from 1% in the previous month, while core inflation is also down to 0.9% from 1.8% in July. The Eat Out to Help Out scheme implemented by the government to incentivize customers to eat in restaurants and other eating establishments by pushing down the cost of dining out remains the most important deflationary driver (it reduced the CPI by 0.5% on its own) along with airfares that felt for the first time on record in August.

In the short-term, inflation will likely stay subdued as the pandemic scars remain. Rising unemployment, which will probably increase much further in coming months as the furlough is coming to an end in October, will push households to cut their spending, thus putting increased downward pressure on prices. The lowest point for inflation in COVID-19 times has certainly been reached, but we are not getting out from prolonged low-flation anytime soon.

Holidaymakers who lost out on their summer trip with TUI have been told to expect a refund by next month.

It follows a barrage of complaints that the company was breaching consumer law by holding onto customers’ cash.

Related: Tui UK vows to pay Covid holiday refunds by October after complaints

Over in Scotland, new economic data shows its economy shrank by nearly a fifth in the last quarter, our Scotland editor Severin Carrell reports.

“While this is a large fall, it is significantly less than if the near 25% contraction in GDP between January and April were sustained over the course of the year.”

“Our illustrative projection of Scotland’s potential output suggests Scottish GDP might be around 4.0% lower in 2025 than it would have been without Covid-19. Significant downside risks to the economy remain if stricter lockdowns have to be re-implemented.

Economic growth will be contingent to the trajectory of bringing the virus under control and is therefore difficult to predict with any certainty at this point.”

The OECD is also urging governments to resist hiking taxes or cutting spending to address the huge borrowing run up during the pandemic.

My colleague Phillip Inman explains:

Governments must resist imposing spending cuts and hefty tax rises before their economies have recovered from the effects of coronavirus lockdowns, a leading global thinktank has warned.

In its quarterly health check of the global economy, the Organisation for Economic Co-operation and Development (OECD) said it would be necessary to continue borrowing extra funds into next year to support the worst-hit households and businesses despite concerns about mounting public sector debts.

Related: Governments should avoid Covid spending cuts and tax rises, says OECD

Newsflash: The global economy is recovering faster from the Covid-19 pandemic than feared, according to the Organisation for Economic Co-operation and Development.

The Paris-based group has hiked its economic forecasts, noting that China and the United States are in better shape than it thought three months ago.

The drop in global output in 2020 is smaller than expected, though still unprecedented in recent history….

Output picked up swiftly following the easing of confinement measures and the initial re-opening of businesses, but the pace of the global recovery has lost some momentum over the summer months

Back in the City, e-commerce player Hut Group has pulled off the biggest UK stock market float since the Royal Mail was privatised in 2013.

Hut owns online retail sites Lookfantastic, Glossybox, Zavvi and Coggles website, plus beauty brands including ESPA and Illamasqua and sports nutrition brand Myprotein.

The biggest London stock market debut since 2013 has netted the company £920m while shareholders led by the group’s founder, Matthew Moulding, will share gross proceeds of £961m.

Moulding has previously said the timing of the float was prompted by private equity backers wanting to sell their investments. The private equity investors KKR have sold all their shares during the flotation.

Related: Hut Group shares jump in value by quarter on first stock market day

The BBC’s Faisal Islam writes that the slide in inflation was due to the “extraordinary action taken to try to get Brits back into town centres”.

The fall to 0.2% is overwhelmingly the result of the impact of Eat Out to Help Out and the temporary VAT cut for the hospitality sector.

It is a statistic that reaffirms what we already know, but also reflects some freakishly temporary factors. The chancellor’s restaurant subsidy scheme is already over, the VAT cuts expire in January.

UK core inflation, which excludes energy, food, alcohol and tobacco, slowed to 0.9 per cent in August from 1.8 per cent in the previous month.

Prices in restaurants and hotels contracted 2.8 per cent in August, compared with the same month last year, the first annual contraction for the sector since the series began in 1989.

Discounts for more than 100 million meals were claimed last month through the government’s “Eat Out to Help Out” programme, which offered diners a state-funded price reduction of up to 10 pounds ($12.89).

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

Prices at restaurants and cafes fell 5.5% from July and were down 2.6% from a year earlier. The decline reflected the fact that consumers paid a subsidized rate during the month, with the government making up the rest.

There was also downward pressure from air fares, which posted the first decline for the month on record after coronavirus restrictions brought international travel to a standstill. Prices fell 1%, compared with a 22.4% increase a year earlier, with the drop driven by European routes, the ONS said.

The EY ITEM Club predicts that UK inflation will hover just above 0% for the rest of 2020, saying:

Price conscious consumers, excess capacity and limited earnings are likely to limit inflation in the near term.

Europe’s stock markets have made an underwhelming start to trading, as investors wait to hear from the US Federal Reserve tonight.

In London the FTSE 100 index has dipped by 6 points, or 0.1%, to 6099 points. Mining companies and retailer Kingfisher are among the risers.

Here’s our news story on the UK’s inflation figures:

Related: UK inflation falls sharply on back of eat out to help out scheme

Computer game prices bucked the downward trend last month, perhaps because of the lockdown has created a boom in home gaming.

It is possible that prices have been influenced by the coronavirus (COVID-19) lockdown changing the timing of demand and the availability of some items, particularly consoles.

However, it is equally likely to be a result of the computer games in the bestseller charts. Price movements for computer games can often be relatively large depending on the composition of these charts.

Tom Stevenson, investment director at Fidelity International, says the UK is facing ‘disinflationary’ pressures – which go beyond one month’s cheap meal offers.

“Eat out to help out was the main influence on the lowest inflation rate for nearly five years. But disinflationary forces were evident across the economy as fears about an autumn surge in unemployment held back consumer confidence. Food, clothing and transport all exerted downward pressure on prices. It remains to be seen if this is part of continued downwards movement or just a monthly dip.

“Weak demand should ensure that inflationary concerns remain on the back burner for now and price growth will track closer to zero through to the end of the year. Rising coronavirus cases, the reintroduction of restrictions, negative wage growth and the prospect of half a million redundancies as the furlough scheme winds down this autumn will all play a part in keeping consumer spending subdued.

CPI inflation falls to 0.2% in August from 1.0% in July, a five year low.

About half the reduction is ‘eat out to help out’, but inflation lower across all but one categories.

This is an economy that badly needs major government investment. (1/2) pic.twitter.com/uSVub9nn7n

Inflation by category – big fall from restaurants, from eat out. But only (and slight) rise is for recreation and culture. Everything else down, with four categories showing falling prices. (2/2) pic.twitter.com/7LnAdX5rlh

“The inflation data in the UK surprised on the upside. The core year-on-year CPI was up 0.9% against expectations of 0.5%. Rising inflation has been much discussed as the inevitable consequence of all the stimulus being injected into the economy. Policy makers won’t be worried about this number, they are more likely to be pleased there is activity in the economy.”

“The Eat Out to Help Out scheme and the cut to VAT for hospitality businesses helped push consumer inflation to just 0.2% in August, for the first time since December 2015.

“The low inflation will serve to protect households’ spending power at times when many are feeling under pressure.

Core inflation, which strips out food and energy costs, also fell last month.

UK inflation shows a huge drop in August but comes in marginally higher than forecast.
Core CPI (YoY) +0.9% (vs +0.6% exp, +1.8% last)
Headline CPI +0.2% (0.0% exp, +1.0% last).

More data that is slightly #GBP supportive. #Forex

Prices across UK hotels and restaurants were 2.8% lower than a year ago in August, the ONS adds.

That’s the first negative inflation reading across the sector in at least 30 years.

The restaurants and hotels group made a downward contribution of 0.27 percentage points in the latest month reflecting a negative 12-month inflation rate of 2.8%. This is the first time that the 12-month rate has been negative since the series began in 1989. The data reflect the effect of the Eat Out to Help Out Scheme. Under this, consumers could get a 50% discount (up to a maximum of £10 per diner) on food and non-alcoholic drinks to eat or drink in every Monday, Tuesday and Wednesday in August at participating establishments.

The reduction in Value Added Tax (VAT) from 20% to 5% on the hospitality sector also contributed to the fall in prices.

This chart from today’s inflation report shows how Rishi Sunak’s discount meal scheme pulled inflation down last month.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Inflation across the UK has fallen sharply, as the government’s Eat Out to Help Out discount meal scheme drove down the cost of living.

Related: Eat out to help out sees diners claim 100m cut-price meals in August

No policy changes are expected from the Fed and given Powell’s recent speech at Jackson Hole, there should be relatively little for the statement or press conference to add.

While acknowledging the more rapid improvement in the economic backdrop, we expect the message to remain one of caution.

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