Inflation remains tame as energy prices recede

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NEW YORK Falling energy prices kept a lid on wholesale inflation in July after a jump in gasoline had boosted prices in June.

The Labor Department reported Wednesday that wholesale prices showed no change last month compared with June, when they had risen 0.8 percent. That was the most in nine months. Energy costs fell 0.2 percent, after June's 2.9 percent surge. Gasoline prices dropped 0.8 percent and natural gas costs slid 3.9 percent. Excluding volatile food and energy costs, so-called core prices rose just 0.2 percent.

Core wholesale prices are up 1.2 percent over the past 12 months, the smallest one-year increase since November 2010. Tame inflation has helped consumers increase spending this year despite slow income growth and higher Social Security taxes. 

"There are few pricing pressures earlier in the supply chain," wrote Gus Faucher, senior economist with PNC Financial Services Group, in a research note. "Outside of energy and residential construction materials, there is little upward pressure on intermediate and crude goods prices, with the global economic growth quite soft."

Aside from sharp swings in gas prices, consumer and wholesale inflation has barely increased in the past year. Overall wholesale prices rose 2.1 percent in July compared with the previous July. For July, drug prices rose 1 percent, the largest gain since a 2.5 percent rise in January. Drug companies have been introducing price increases in January and July of each year.

Food costs were flat in July as a jump in pork prices was offset by a decline in the cost of fresh vegetables.

On Thursday, the government will report on consumer prices for July, and economists estimate that overall and core prices rose just 0.2 percent. For the 12 months ending in June, overall consumer prices rose 1.8 percent and core prices 1.6 percent. Those levels are below the Fed's 2 percent target for inflation.

At its last meeting in July, the Fed added language to its policy statement to express concern that inflation persistently below 2 percent could pose risks to the economy. The Fed announced after the meeting that it planned to keep buying $85 billion a month in bonds to keep downward pressure on long-term interest rates. It also said it planned to keep its key short-term rate near zero, where it's remained since December 2008 - at least as long as unemployment is above 6.5 percent.

Chairman Ben Bernanke and other Fed officials have said the central bank could start slowing its bond purchases later this year. Some economists think that could begin after the Fed's next meeting in September. 

With inflation well below the Federal Reserve's 2 percent target rate, the central bank has room to maintain the easy money policies that it has employed since 2008 to boost economic growth, Faucher said.