Price cuts by manufacturers add to profitability worries

Recession-hit manufacturers were forced to cut their prices last month, according to official figures yesterday that added to fears of a slump in corporate profitability.

Recession-hit manufacturers were forced to cut their prices last month, according to official figures yesterday that added to fears of a slump in corporate profitability.

The unexpected fall in industrial prices raised hopes of a fall in the overall rate of inflation, published later today, which would open the door to further cuts in interest rates.

The price of goods leaving the factory gates fell 0.2 per cent in July to leave annual inflation of just 0.1 per cent, the lowest since January 1999. This was well below City forecasts of an annual rise of 0.3 per cent. Danny Gabay, UK economist at JP Morgan, said: "Inflation in the manufacturing sector is rapidly turning into disinflation."

Economists warned falling prices would further erode manufacturers' rates of return, already at their lowest level since the recession of 1992. Simon Rubinsohn, at the fund manager Gerrard, said there was little basis for a recovery until next year at the earliest. He added: "This is likely to maintain pressure on the Bank to sanction a further rate cut."

There was a glimmer of hope from a steep fall in the cost of raw materials. Input prices fell 1.8 per cent in July to stand at 0.3 per cent below last year's prices. It was largely due to an 11.8 per cent drop in the cost of crude oil. Consumers and businesses have benefited with petrol prices falling by 5.2 per cent a year, the lowest rate since records began in 1992.

The largest fall in output prices was for computer and office machines, where wholesale prices tumbled by 16.7 per cent.