The tiny advance in the Consumer Price Index, the government's most closely watched inflation gauge, last month matched June's increase, the Labor Department reported Friday.
In a related development, U.S. builders broke ground for new homes at a slower pace in July, marking the second straight month that housing starts have fallen despite low mortgage lending rates.
The Commerce Department said starts fell 2.7 percent to a seasonally adjusted annual rate of 1.649 million units in July. That followed a revised 2.7 percent drop in starts in June to a 1.695 million annual pace. The declines, coming after a strong showing in the spring and early summer, were not unexpected.
The latest reading on the CPI, on the other hand, was better than expected. Analysts had anticipated an 0.2 percent increase.
That's good news for Federal Reserve Chairman Alan Greenspan and his colleagues because tame inflation gives them leeway to keep interest rates low in an effort to help the struggling economic recovery get on a firmer footing.
Fed policy-makers this week decided to hold rates steady at 41-year lows, but opened the door to future reductions if economic conditions warrant.
One of the few benefits of the lackluster recovery is that many companies have little leeway to raise prices.
And companies, concerned about whether Americans' appetites will hold up amid stock market turmoil and eroding consumer confidence, have continued to discount merchandise and offer other incentives, providing shoppers with some bargains.
In July, clothing prices fell 1 percent, the biggest decline since April. Airfare costs went down by 1.3 percent, the largest drop since November. Prices for new cars and trucks were flat.
Energy prices, however, rose by 0.4 percent in July, after being unchanged the month before. Falling prices for electricity and natural gas were swamped by a 1.5 percent increase in gasoline prices and a 0.9 percent rise in fuel oil costs.
Food prices edged up by 0.2 percent last month, after a tiny 0.1 percent increase in June. Lower prices for beef, pork, fruit and dairy products tempered higher prices for vegetables and poultry.
Excluding food and energy prices, the "core" rate of inflation rose 0.2 percent in July, following a 0.1 percent gain.
One of the reasons behind the increase was a sizable 0.7 percent rise in medical care costs, the largest advance since May 1993. Medical costs have continued to rise despite the sputtering economy, hitting Americans in their pocketbooks and wallets.
So far this year, medical care costs have risen at an annual rate of 5 percent. In contrast, consumer prices as a whole have gone up at a rate of 2.5 percent during the same period.