Cheaper gas keeps consumer prices flat

WASHINGTON -- Consumer prices were unchanged in June, held down by cheaper gas. Outside the volatile food and energy categories, inflation was mild.

Weak economic growth is limiting the ability of companies to raise prices. The tame inflation was underscored by a 0.2 percent drop in consumer prices for the April-June period as a whole. That was the first quarterly drop in consumer prices in two years.

In May, the consumer price index fell 0.3 percent. In April, it was unchanged.

In its report Tuesday, the Labor Department said gas prices fell a seasonally adjusted 2 percent in June, the third straight decline. Food prices edged up 0.2 percent.

Excluding the volatile food and energy categories, "core" prices rose 0.2 percent last month. It was the fourth straight increase of that size. But some analysts think core prices will begin to slow.

"With the economic recovery stalling and the unemployment rate still elevated, we would expect core inflation to ease soon," Paul Ashworth, an economist at Capital Economics, said in a note to clients.

Mild price increases leave consumers with more money to spend, which could spur more growth. Lower inflation also gives the Federal Reserve room to launch new programs intended to boost the economy.

The inflation report comes as Fed Chairman Ben Bernanke kicked off two days of testimony on Capitol Hill. He will appear before the Senate Banking Committee Tuesday and a House panel Wednesday. Bernanke's remarks will be watched for any hints that the Fed is preparing to take further action to try to accelerate growth.

Over the past 12 months, consumer prices are up 1.7 percent. That matches the increase for the 12 months that ended in May -- the smallest increase in more than a year. It's also below the Fed's inflation target of 2 percent.

Core prices have risen 2.2 percent over the past year.

In June, a jump in fruit and vegetable costs and higher prices for meats, poultry, fish and eggs pushed up food prices. But prices of milk and other dairy products and cereals and bread fell.

The cost of health care services rose by the most in nearly two years last month, pushing up core prices. Clothing prices rose for the fourth month in a row. Cable TV and other recreation services prices increased, too.

At its June 19-20 policy meeting, the Fed agreed to extend a program that alters its bond portfolio to try to lower long-term interest rates. The aim is to inspire more borrowing and spending. And minutes of that meeting show a growing number of members are open to adopting further stimulus measures, such as launching another round of bond buying. But policymakers are at odds over whether the economy needs more help now.

Hiring has slowed sharply after a fast start to the year. And a report Monday said Americans spent less at retail businesses for a third straight month in June.

But inflation, at least, isn't a problem. If the Fed were worried that prices are rising too fast, it might have to raise interest rates.

In the 12 months that ended in May, consumer prices rose 1.7 percent, much lower than the 12-month increase of 2.3 percent in April. That's below the Fed's 2 percent target for inflation. Core prices have risen 2.3 percent in the past year.

Gas prices have tumbled more than 50 cents a gallon since peaking in early April, although they may be leveling off. On Monday, the average nationally price for a gallon of gas averaged $3.40, according to AAA. That's two cents higher than the previous week, but still 11 cents lower than a month earlier.

A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.

The economy is growing but at a sluggish pace. That is keeping a lid on price increases. Slow growth makes it harder for consumers and businesses to pay higher costs. The economy expanded at just a 1.9 percent annual rate in the January-March quarter. Many economists expect growth slowed further in the April-June quarter.