Cheaper drugs help inflation rate

Prices in shops fell in July thanks to cheaper drugs and the tailing off of the foot and mouth epidemic, retailers said yesterday.

Food prices declined last month for the first time since the start of the year, according to the British Retail Consortium. The abolition of price fixing for over the counter drugs helped cut 1% off overall shop prices in July.

The figures confirm the Bank of England's belief that the rise in underlying inflation earlier this year was one off, caused by bad weather pushing up seasonal food prices, and foot and mouth restricting meat supplies.

Simon Rubinsohn, chief economist at Gerrard said: "Today's data certainly provides support for the Bank of England's benign view of the inflation outlook; indeed it is conceivable that, as the economy weakens, the numbers could surprise on the downside."

The Bank said earlier this week that it expected underlying inflation to fall from its current level of 2.4% - just under the government's 2.5% target - to 2% by the end of the year.

Shop prices have traditionally fallen in July as retailers kick off the summer sales. But with consumer demand still robust, there have been reports that sale tags were not as much of a bargain as in previous years.

Jeremy Batstone, head of research at NatWest stockbrokers, warned against placing too much emphasis on one month's figures. "Retailers are much better at managing stock levels and are more able to sell more stock at full price these days. Sales are generally shorter."

Official figures out next week are expected to confirm that inflation eased to 2.3% in July. But Geoffrey Dicks from the Royal Bank of Scotland believes inflation could jump back above the target the following month.