Shops counter rate rises with price cuts

The Bank of England's concerns about rising prices were temporarily assuaged yesterday with news that strong competition in Britain's retailing sector pulled down the annual inflation rate last month.

With interest rates rising, shops fell back on deep discounts in the summer sales to attract warier consumers, according to data released by the Office for National Statistics.

The fall in the consumer prices index from 1.6% to 1.4% is unlikely to last, according to City analysts. The underlying strength of demand was reflected in Britain's record trade deficit. They expect the Bank to reiterate its anxiety about the medium-term outlook when it releases its quarterly inflation report today.

Motorists face further increases in petrol prices following the recent sharp increase in the cost of crude oil.

Ray Holloway of the Petrol Retailers Association said petrol had risen by about 2p a litre over the last 10 days to an average of 81.7p per litre, and drivers should be prepared for an increase of a penny over the coming month. The AA said prices were likely to remain above 80p a litre for the foreseeable future.

Howard Archer, economist at Global Insight, said the easing back in the CPI to well below the government's 2% target did not significantly alter the outlook for interest rates, even though the drop was slightly larger than expected.

"The Bank of England had acknowledged that inflation was likely to fall back in the near term when hiking interest rates last week, and is more concerned about the increased underlying inflationary pressures stemming from above-trend growth and a small and rapidly disappearing output gap, as well as rising earnings amid a tight labour market. Furthermore, oil prices have moved back up recently."

Yesterday's figures showed that the price of furniture and furnishings dropped by 4% last month - against a smaller 1.8% fall in July 2003 - as outlets struggled to shift stock. Clothing and footwear prices were down by 4%, a similar decrease to the 3.8% decline in the same month a year earlier.

Officials said cheaper seasonal food and competition among fixed line and mobile telephone companies had contributed to the fall in inflation. On the latest data available, only four of the EU's other 24 nations have lower inflation - Denmark, Finland, Sweden and Lithuania.

Higher mortgage rates offset some of the price falls, keeping headline retail price index inflation at 3%.

Separate ONS figures revealed that Britain's trade moved deeper into the red in June, with the deficit in goods rising from £4.8bn to £5bn and the surplus in services unchanged at £1.2bn.

In the second quarter of 2004 - a better guide to the underlying trend - there was a deficit of £14.6bn in goods and a deficit of £10.8bn in goods and services combined, both records.

The ONS said the deterioration was due to adverse trends in oil and erratic items - such as precious stones and aircraft - where the pattern of imports and exports is irregular, and the arrival in Britain of £100m of thoroughbred race horses from Dubai. Stripped of oil and erratics, the deficit in goods and services fell slightly in June from £5bn to £4.9bn and was unchanged over the quarter.