Cheaper food helps shop prices fall

Food prices fell in July for the first time this year

The Bank of England may have scope for further cuts in interest rates following new figures released on Thursday.

The British Retail Consortium's (BRC) latest price survey showed shop prices fell more than 1% in July compared to the previous month.

Meanwhile figures from the Department of Trade and Industry (DTI) showed construction orders dropped sharply in the second quarter of this year.

On Wednesday the Bank's latest inflation report painted a gloomy picture for the short-term prospects of the UK's economy.

Prices fall

The 1.06% drop in prices during July meant shop prices were only up 0.37% on the same time last year.

The BRC said last month's price drop was helped by price-cutting during the summer sales, and cheaper over-the-counter drugs following the recent abolition of price controls.

Construction orders fell sharply during the second quarter

The fall in prices was also helped by the first drop this year in the cost of food as the effects of foot and mouth disease began to weaken.

Meat prices had risen earlier this year as the spread of the disease restricted supplies.

Prices of fruit and vegetables had also soared earlier this year when crops were hit by bad weather.

"The BRC Shop Price Index for July shows that consumers are still benefiting from low prices driven by intense competition in the high street," said Mark Bradshaw - deputy director general at the BRC.

More rate cuts?

The Bank of England's inflation report released on Wednesday said it expected inflation to fall back to 2% before the end of the year.

So signs of falling shop prices might give the Bank room for another cut in interest rates.

But Jeremy Batstone, head of research at NatWest Stockbrokers urged caution.

"I'd be a bit wary about reading too much into one month's data, especially if during a sales period... I don't think this marks the start of a trend," he said.

Construction hit

More evidence of the slowdown in UK industry came from the construction sector on Thursday.

DTI figures showed construction orders fell 16% in the second quarter from the first 3 months of the year, and dropped 12% compared with the same period last year.

The figures reinforce the impression that the non-service sector of the UK economy is suffering.

On Monday, government figures showed the manufacturing sector had officially fallen into recession.