Core consumer prices, which exclude volatile food and energy costs, ticked up 0.1 per cent last month, the Labor Department said Wednesday. More expensive medical costs, clothing and rents pushed up core prices.
Overall prices increased 1.4 per cent in the 12 months ending in July. That's down from 1.7 per cent in June and is the smallest yearly increase in 20 months. Core prices have increased 2.1 per cent in the past year, down from a 2.2 per cent pace in June.
A severe drought in the Midwest threatens to push up supermarket prices later this year. But in July, the cost of food only increased 0.1 per cent. Bread, beef and chicken all were more expensive in July. But prices for cheese and other dairy products and fruits and vegetables fell.
Mild price increases leave consumers with more money to spend, which can boost economic growth. Lower inflation also gives the Federal Reserve more leeway to launch new programs intended to boost growth.
"Inflation is on a clear downward trajectory," said James Marple, senior economist for TD Economics. "With an unemployment rate at 8.3 per cent, weak economic growth, both domestically and globally, and a rising U.S. dollar, inflation is likely to drift lower over the coming months."
But low prices may not last much longer.
The drought in the Midwest has damaged corn, soybeans and other crops, which will likely push up a range of food prices on grocery store shelves in the coming months.
Corn is used in many processed foods, from cereals to soda. And both corn and soybeans are used in animal feed, so higher costs for those grains will likely push up meat prices.
Wholesale food prices rose 0.5 per cent in July for the second straight month, the government said Tuesday. Wholesale corn prices jumped 34.5 per cent, the largest gain since Oct. 2006.
Gas prices have also increased recently after falling from a peak near $4 a gallon in April. The average national price for gas was $3.71 a gallon on Wednesday. That's up 31 cents from a month ago.
For now, slow economic growth has kept a lid on prices. The economy expanded at just a 1.5 per cent annual rate in the April-June quarter, down from 2 per cent in the January-March quarter and 4.1 per cent in the final three months of last year.
The Fed signalled at a meeting in late July that it is ready to act if growth and hiring stay weak. That led many economists to predict the Fed would announce a third round of bond purchases designed to push long-term interest rates down and generate more borrowing and spending in the economy.
But recent signs point to some economic improvement in July. Employers added the most jobs in five months, while consumers increased their retail spending after three months of declines. A slightly better outlook for the economy could prompt the Fed to hold off on taking action when its policy committee next meets in September.