Consumer prices rise after 3 straight declines

WASHINGTON - A rise in the cost of gas drove consumer prices up last month by the most in nearly a year, but overall inflation remained tame.

The Consumer Price Index, the government's most closely watched inflation measure, increased 0.3 percent in July, the Labor Department said. That followed three months of declines.

Pushing the index up was a 4.6 percent increase in the price of gas.

Excluding volatile food and energy prices, the so-called "core" price index increased 0.1 percent in July.

Over the past year, core consumer prices rose 0.9 percent - the slowest pace in 44 years.

One small benefit of the weak economy is that it is keeping prices in check. Consumers are spending cautiously and saving more, which makes it harder for companies to raise prices.

But low prices have not been enough to boost the recovery. A separate report Friday showed that retail sales rose modestly in July, but that was mostly due to higher auto and gasoline purchases. Outside those categories, most other retailers saw their sales fall.

Tame inflation allows the Federal Reserve to keep the key interest rate it controls at a record low of nearly zero percent in an effort to bolster economic growth. The Fed usually fights rising inflation by raising rates.

And the first increase in overall prices in four months is likely to ease concerns about deflation, which some Fed officials had raised in recent weeks. Deflation is a widespread and prolonged drop in the price of goods, real estate and stocks. It also reduces wages and makes it harder to pay off debts.

The U.S.'s last serious case of deflation was during the Great Depression. Most economists don't believe deflation will happen. But they are watching consumer prices closely for any signs of it.

"I don't think the threat of deflation can be taken off the table until the recovery is off and running, and that won't be until next year," said Ryan Sweet, an economist at Moody's Economy.com.

The July rise in core prices was driven partly by a 0.1 percent increase in the cost of housing, which accounts for about 40 percent of the core index.

The Labor Department relies heavily on rents to calculate that cost. As the weak housing market causes more people to rent rather than buy homes, economists say rents could rise in coming months. That would push up the core consumer price index and reduce the risk of deflation.

If rents rise sharply, that could distort the core price index by raising it even as the prices of other goods fall.

So far there's little sign of that taking place. Last month the prices of other goods also rose slightly, such as clothing and automobiles.

Higher energy costs accounted for about two-thirds of the increase in consumer prices. Energy prices rose 2.6 percent in July, the first increase since January. Gas prices jumped 4.6 percent and household gas and electricity prices also rose.

Gas prices averaged $2.776 a gallon on Thursday, up about a penny from the previous week, according to AAA, Wright Express and Oil Price Information Service.

Food prices dipped in July as the cost of fruits and vegetables fell by the most in five years. Cereal and baked goods prices also declined.

Food costs will likely move higher in coming months as recent increases in the price of wheat and other grains impact the index.

The cost of wheat soared after Russia said last week it was cutting off exports of wheat, barley, rye and corn. A severe drought in that country has destroyed one-fifth of the country's wheat crop. That sent wheat prices to two-year highs last week.