On a sunny weekday in central Birmingham, evidence of discount Britain is everywhere, whether it is the big sale banners plastered across windows or the glut of reduced signs inside stores.

In the Bullring shopping centre and along the adjoining high street, discounts are advertised at big names such as Marks & Spencer, Debenhams, Topshop and Bhs, which are all offering price cuts of up to 50%. Elsewhere, the likes of Mango, Warehouse, H&M and Zara have all got summer clothes on bargain rails.

It would be no surprise to shoppers in the Bullring that the biggest contribution to a dive in the rate of inflation last month was a 5.7% decline in the price of clothing and footwear. The cuts helped drive down the consumer prices index from 1.9% in June to 1.6% in July, which in turned reduced the prospect of an interest rate rise before the end of 2014.

Clothing prices fall in the summer as retailers try to offload seasonal stock before the autumn. One of the main reasons the bargains were so tempting last month was because strong demand for summer clothing during the fine weather led stores to delay offering deals.

"Retailers had the perfect summer. There was an early start to the warm weather and then it was pretty constant. Unless they made very poor buying decisions they should have much less stock left on the shelves which they need to offload," says Lorna Hall, head of market intelligence at retail trends agency WGSN.

So the bargains and the dip in inflation may be short lived, which is not good news for shoppers faced with stagnant wage growth and the threat of steeper housing costs when interest rates rise.

But Bryan Roberts of analysts Kantar Retail points to evidence of an entrenched trend for cheaper clothing even among full-priced items. In M&S, for instance, there is a range of simple long-sleeved T-shirts prominently displayed, priced at £8. "They're really making an effort on the price of these basic items but I bet they don't cost that much in Primark," he says.

This is an example of the Aldi and Lidl effect being replicated in the nation's clothes stores. The threat of losing shoppers to the German discounters is helping to drive down prices on everyday foods such as bread and milk at the supermarket chains, which contributing to the first-ever annual decline in food spending last month. Food prices fell by 0.2% month-on-month.

The success of Primark and supermarket clothing ranges continues to put a brake on any price rises among the traditional high-street fashion stores. Even at the Birmingham branch of Selfridges there are large areas devoted to Primark alongside more upmarket brands such as Karen Millen and Ted Baker.

This week, Lidl opened a new front in its war with the supermarkets with a small range of fashion items including jeans, faux leather jackets for as little as £14.99 and ankle boots, priced very keenly compared with rivals' own-label ranges and well below the likes of M&S.

"The timing of the sales has been a major contributor to deflation this summer but over the long term ongoing levels of competition in the high street are not going to get any easier," says Roberts. "People are going to have to sharpen their pricing a bit more."

Price falls are the result ofdue to a combination of factors including a drop in global cotton prices as well as lower manufacturing costs owing to downward pressure on wage rises in China, where many UK-sold clothes are made. There is also the pound's strength against the dollar, the currency via which much of the retail trade operateswhich makes clothing imports cheaper.

At the same time, shoppers are nervous about spending their money despite the upturn in the UK economy as wage rises have been outpaced by the rate of inflation for several years – wages fell for the first time since 2009 between April and June. Job security remains an issue for many, with record self-employment pointing to the fragility of the jobs market.

"Even if you have got a decent level of disposable income, you're being a lot more cautious about balancing out needs and wants," says Roberts. "Money that traditionally would've been spent on discretionary purchases like a new outfit or cosmetics has been diverted to telecoms and technology. People are shelling out £30 to £40 a month on mobile phone fees."

In Birmingham, shoppers who are confident about spending are hard to find. Wayne and Caroline Davey and their two sons think very hard about what they buy. Caroline Davey says: "We are teachers and we have had no pay rise for years. Inflation has gone up and our wages have stayed still and that has had a significant impact."

Retired couple Terry and Carol Fallows say they have also changed the way they shop, using the internet to seek out the best prices on big ticket items they want as low interest rates mean they must carefully guard their savings. Carol Fallows says: "Instead of just going to one supermarket we go to several different ones because the prices are so different. In the past I used to mainly shop in Asda and Sainsbury's, now it's Morrisons and Aldi and sometimes Asda."

Retailers say that kind of approach is the main factor which will continue to put a brake on prices well beyond the summer sales season.

Kate Bostock, who now runs small fashion chain Coast but formerly worked at Next, M&S and George at Asda, says: "The pressure is on to keep prices affordable, and that all goes back to the consumer and what they are prepared to pay. There's no question that competition remains strong."

Shoppers may have little more to spend but in Birmingham, the rising competition is there for all to see. Behind the Bullring, a forest of cranes marks the building site for a planned new indoor shopping mall called Grand Central, which will include a John Lewis department store and will add 450,000 sq ft of new shopping space. As in the rest of the country, sSomeone is going to lose out.

Roberts says: "We are reaching the realisation that there are too many stores and too much stuff so the only logical outcome of that is slashed prices."

That could be good news for shoppers but tricky times for the economy – and retailers in particular.