Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, were a key driver in the fall, making the largest downward contribution to the 12-month inflation rate.
Sandra Holdsworth, head of global rates for the UK at Aegon Asset Management, said:
"The UK inflation rate for August reached the lowest level since 2016 today, with Consumer Prices Index inflation at a mere 0.2% y/y, and inflation measured by the Retail Price Index rising at 0.5% y/y, a level not seen since just after the financial crisis.
"Part of the reason inflation recorded such low levels in August was the effects of cuts to VAT rates in certain sectors, as well as the Eat Out to Help out scheme coming into the calculation.
"As these schemes end there should be some short-term bounce back in prices. 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.
"We can expect to see prices in many sectors remain under pressure and inflation rates remain close to 0% for some time. This, of course, puts pressure on the Bank of England to act in some way but with interest rates close to zero already the options are limited unless the Bank starts to countenance seriously the prospect of negative interest rates."
