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European retail sales fell for a second month in July as higher food and fuel costs eroded consumer confidence and spending power, the Bloomberg purchasing managers' index showed.

While the measure of sales activity in the euro region rose to 46 from 44 in June, it remained below the 50 mark that indicates growth. The index, based on a survey of around 1,200 executives compiled for Bloomberg LP by Markit Economics, also showed that retailers cut jobs for a fourth month as they missed sales targets.

Record oil and food prices pushed Europe's inflation rate to 4 percent last month, the highest in 16 years. That's curbing consumer spending and exacerbating the economic slowdown as the U.S. housing slump and a stronger euro weigh on exports. Manufacturing and service industries also contracted for a second month in July.

“We don't reckon inflation is going to get below 3 percent before the end of the first quarter next year, so the squeeze on incomes will be maintained,'' said Gareth Claase, an economist at Royal Bank of Scotland Group Plc in London. “As long as that's the case, consumer spending is going to remain under pressure.''

Sales fell in Germany and Italy in July and rose “modestly'' in France, Markit said. From a year earlier, overall euro-area sales declined, led by a slump in Italy.

Separate reports this week showed that consumer confidence in Germany, Europe's biggest economy, dropped to the lowest in more than five years while sentiment in France fell to a record low.

Oil Prices

Crude oil has risen 61 percent in the last 12 months, lifting the cost of gasoline and home heating oil. Consumers are also paying more for food after prices for corn and wheat soared.

Carrefour SA, Europe's biggest retailer, is facing a “deep and durable'' global economic crisis, Chairman Amaury de Seze said on July 28. The company's operating profit climbed 5 percent in the first half, less than the 7 percent growth it forecast quick payday loan.

Some retailers appear to be coping with the downturn. Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, this month said second-quarter sales rose 15 percent. Chief Financial Officer Michel Favre said the company is seeing “a switch of consumer traffic from hypermarkets to discount stores,'' which may buffer it from some of the economic downturn.

Rising prices are squeezing profit margins as companies offer discounts to lure shoppers, Markit said. Euro-region sales were below expectations in July, and German and French retailers expect to miss their targets again in August.

Job Cuts

Praktiker AG, Germany's second-largest home-improvement retailer, cut its full-year sales growth forecast on July 23.

With costs rising, retailers continued to cut jobs in July, Markit said, with a gauge of employment growth holding below 50 for a fourth consecutive month. Wholesale price inflation accelerated, with a gauge of prices paid by retailers rising to 67.3, the fourth highest since the index began in January 2004.

Metro AG, Germany's largest retailer, plans to close as many as 20 Adler fashion stores in Germany and Austria because they are losing money, it said this week.

The European Central Bank this month raised its key interest rate by a quarter point to 4.25 percent to curb inflation even as economic growth slows. The bank in June forecast the pace of euro- area expansion will slow to about 1.5 percent in 2009 from 1.8 percent this year. The economy grew 2.7 percent in 2007.

For the Bloomberg retail indicator, Markit Economics recruited a panel of companies in Germany, France and Italy, which together make up around 80 percent of total euro-area retail sales by value. The panel includes large chain retailers as well as smaller stores.

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