Factory activity shrinks as prices surge

By Matt Falloon

LONDON (Reuters) - British manufacturing activity fell for a third straight month in July and at the sharpest rate in almost a decade as firms struggled with record price pressures and a slump in orders, a survey showed on Friday.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index fell to 44.3 last month from 45.9 in June, below forecasts for a reading of 45.5 and the weakest reading since December 1998.

Any reading below 50.0 indicates contraction, while a score above 50.0 points to growth.

The figures are likely to stoke fears that Britain is teetering on the edge of its first recession -- at least two quarters of contraction -- since the early 1990s.

House prices are slumping at their fastest annual rate since at least 1991 and consumer confidence is at a record low.

Recent data from CIPS, which also surveys the dominant services sector and the faltering construction sector, indicate a contraction in the economy is well under way.

But record price pressures in the manufacturing sector are also likely to keep hopes for lower interest rates in check.

Bank of England policymakers are grappling with the strongest inflation rate -- 3.8 percent -- they have faced since the central bank was given the power to set interest rates in 1997. Inflation could soon even hit 5 percent.