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August 17, 2010 > Consumer prices rise after 3 straight declines

Consumer prices rise after 3 straight declines

By Christopher S. Rugaber, AP Economics Writer

WASHINGTON (AP), Aug 13 - Consumer prices in the U.S. rose in July by the most since last August as energy costs increased for the first time in five months.

The increase is likely to ease concerns, raised in recent weeks by some Federal Reserve officials, that the weak economy could tip into deflation. 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 Labor Department said Friday that the Consumer Price Index, the government's most closely watched inflation measure, increased by 0.3 percent in July, after three months of declines. Wall Street economists expected a smaller increase.

Over the past year, consumer prices rose by 1.2 percent, the department said. That's up slightly from last month's 1.1 percent pace but still a mild increase.

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.

A separate report Friday showed that retail sales rose modestly in July, but mostly due to higher auto and gasoline purchases. Outside those categories, most other retailers saw their sales fall. The broad declines outside of auto and gas sales are a sign of a slowing recovery.

Excluding volatile food and energy prices, the so-called ``core'' price index increased by 0.1 percent in July, as the cost of housing, clothes, and used cars and trucks all rose.

Core prices moved up by 0.9 percent in the past year for the fourth month in a row, the department said. That's below the Federal Reserve's inflation target and is the slowest pace in 44 years.

The low core inflation rate, along with the three months of declines in the consumer price index, has fanned deflation fears. 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.

Meanwhile, 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.

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

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.

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