The price of the average family's shopping basket dropped by 0.5 per cent during the month, unexpectedly cutting the annual rate of inflation from 2.6 to 2.3 per cent. This was the lowest since March and came as a surprise to City economists, who had not expected a fall.
The price of clothes and footwear fell by more than 4 per cent last month, more sharply for the time of year than at any time since before the First World War. Prices for household goods such as furniture and electrical appliances fell more than in any July since 1956.
The number of people unemployed and claiming benefit fell by 11,800 in July, after adjusting for the 69,000 rise in the jobless total normal for the time of year. The unemployment total is at a two- and-a-half year low of 2,631,500.
Michael Portillo, the Employment Secretary, said the figures showed 'not only that we are doing well today but that we can sustain our recovery into the future.'
But Conservative Party leaders fear that recovery will not boost voters' confidence by enough to revive the Government's popularity. 'We are beyond the recovery phase and into the growth phase, but there is no feel-good factor out there,' said a key Tory strategist.
Leading Tory MPs warned the Government not to rely on recovery to restore its support. 'We will need more than these figures to get our support back,' said one senior backbencher.
Conservative Party leaders are planning to write to all Tory constituencies to boost confidence in the recovery and to counter Labour criticism of the Government's performance. Curbs on take-home pay and unemployment among white- collar workers in the South are still unsettling middle-class supporters.
The Government's target measure of underlying inflation - which excludes mortgage interest payments - fell from 2.4 per cent in June to 2.2 per cent in July, the lowest figure since 1967. This was a slightly bigger drop than that predicted by the Bank of England in its latest quarterly inflation report. The Chancellor is committed to having underlying inflation below 2.5 per cent by the end of the Parliament in spring 1997.
The battle for customers among Britain's supermarkets left non-seasonal food prices 0.7 per cent lower than a year earlier, the largest annual fall since 1961. But seasonal foods have risen by more than 9 per cent in the past year. Droughts have hit Spanish onion production, but the European Union has created a glut of nectarines by forbidding the Italians to distill them into alcoholic drinks. Lower motoring costs and newspaper price cuts also pushed inflation down.
The fall in inflation had City dealers betting against an early rise in interest rates, although most economists expect base rates to rise some time before the end of the year. The FTSE index of 100 leading London shares closed 43 points higher at 3,190.3, adding nearly pounds 10bn to the value of the shares.
'Such astonishingly good numbers will make it very hard for Eddie George, the Governor of the Bank of England, to force a rise in base rates in September,' said Ian Shepherdson, economist at City firm HSBC Greenwell. But Adrian Cooper, of James Capel, said: 'If the data over the next couple of months suggest that the recovery is continuing to accelerate, we would still expect the Bank to push for a pre-emptive rise in the autumn.'
'There is no evidence of inflationary pressures which would justify an increase in interest rates and a rise at this stage could be damaging to the pace of economic growth,' said Tim Melville-Ross, head of the Institute of Directors.
There was more good news on inflation from the Department of Employment, which reported that growth in average earnings was stable at 3.75 per cent. This implies that pay settlements are not yet pushing the rate of price increases higher. July's fall in unemployment was also the lowest for six months, taking the average fall over three months to its lowest since September last year.
Labour accused the Government of 'deceit' over the unemployment figures. Ann Clwyd, their spokeswoman on employment, said the real figure was two million higher and called for more job creation, financed by capital receipts from council house sales.
Figures flatter to deceive, page 3
Shares rise, bonds weak, page 15
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