The Labor Department said Thursday that the consumer price index rose 0.2 per cent in July after a 0.5 per cent increase in June. Gas prices rose just 1 per cent after jumping 6.3 per cent in June. Excluding food and gas costs, which are volatile, "core" prices also rose 0.2 per cent in July.
Over the past 12 months, consumer prices have risen 2 per cent. Core prices have increased 1.7 per cent in the past 12 months, still below the Federal Reserve's 2 per cent inflation target.
Slightly higher inflation could make it easier for the Fed to start pulling back on its low-interest-rate policies. Falling inflation would pressure the Fed to continue stimulating growth.
The Fed announced after its July meeting that it planned to continue buying $85 billion a month in bonds to keep downward pressure on long-term interest rates. It also said it planned to maintain a key short-term rate near zero, where it's remained since December 2008 — at least as long as unemployment stays above 6.5 per cent.
But Chairman Ben Bernanke and several other Fed officials have said the central bank could start slowing its bond purchases later this year. Some economists think such a change could be announced at the Fed's next meeting on Sept. 17-18.
Most analysts expect the slowdown to be gradual. New bond purchases might not end until mid-2014 — and only then if the unemployment rate has dropped to around 7 per cent.
More expensive fruits and vegetables pushed up the price of food in July, which ticked up just 0.1 per cent. Meat, chicken and fish also rose in price, while other food groups fell. Baked goods and cereals, milk and other dairy products, and fruit juices and other drinks all fell in price.
Core prices were pushed up by a big jump in clothing costs, which rose 0.6 per cent, the third straight gain. Rents and new car prices also rose. Airline fares, meanwhile, fell 1.3 per cent last month.
Economic growth is too slow and unemployment too high to spur much inflation. Hourly wages and incomes have barely grown since the recession ended four years ago. That makes it hard for retailers to raise prices.
Unemployment dropped in July to 7.4 per cent from 7.6 per cent in June. The July figure was a 4 1/2-year low, but it was still well above the 5 per cent to 6 per cent range that economists associate with a healthy economy.
The economy grew at a scant annual rate of 0.1 per cent in the October-December quarter and then at lacklustre annual rates of 1.1 per cent in the first three months of this year and 1.7 per cent in the April-June quarter.
But many economists think growth will accelerate to a 2.5 per cent annual rate in the second half of this year as the effects of tax increases and government spending cuts begin to fade.