By CHRISTOPHER S. RUGABER
WASHINGTON (AP) -- US consumer prices were unchanged in July from June, as a small drop in energy costs offset slightly higher food prices. The consumer price index hasn't increased since March, evidence that the weak economy is keeping inflation in check.
Core consumer prices, which exclude volatile food and energy costs, ticked up 0.1 percent last month, the Labor Department said Wednesday. More expensive medical costs, clothing and rents pushed up core prices.
Prices increased 1.4 percent in the 12 months ending in July. That's down from 1.7 percent in June and is the smallest yearly increase in 20 months. Core prices have increased 2.1 percent in the past year, down from a 2.2 percent 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 percent. Cereals, bread, meat 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 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 percent, weak economic growth, both domestically and globally, and a rising U.S. dollar, inflation is likely to drift lower over the coming months."
The Fed signaled at a meeting in late July that it is ready to act if growth and hiring stays 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.
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.
Falling inflation could even encourage Fed Chairman Ben Bernanke to launch another round of bond-buying. A small amount of inflation can be good for the economy, because it encourages consumers and businesses to spend before prices rise further.
"Core prices appear to have topped out for now while (overall) prices have been pushing lower since the middle of 2011," Dan Greenhaus, chief economic strategist at BTIG, said in an email to clients. Fed policymakers "will not like that very much."
For now, slow economic growth has kept a lid on prices. The economy expanded at just a 1.5 percent annual rate in the April-June quarter, down from 2 percent in the January-March quarter and 4.1 percent in the final three months of last year.
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 percent in July for the second straight month, the government said Tuesday. Wholesale corn prices jumped 34.5 percent, 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.
Copyright 2012 The Associated Press.