WASHINGTON (AP) - Inflation was a no-show in July and likely will stay away for months to come, giving the Federal Reserve room to keep invigorating the economy with record-low interest rates.
That was the message economists took from a report Tuesday that wholesale prices fell over the past 12 months by the sharpest amount in 62 years of record-keeping - the latest sign that inflation is posing no threat.
"In this economy, there really is no pricing power at all," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.
The Labor Department said wholesale prices sank 0.9 percent in July, triple the decline that economists had expected. Over the past year, wholesale prices have dropped 6.8 percent. That's the biggest drop in records dating to 1947.
A steep decline in energy prices drove the overall drop. But even apart from energy and food prices, which tend to be volatile, inflation was calm. The so-called "core" inflation rate for wholesale goods - excluding food and energy - fell 0.1 percent in July. And over the past 12 months, the core rate has ticked up a moderate 2.6 percent.
Economists expect inflation to remain tame as the economy struggles to mount a sustained recovery. High unemployment, wary shoppers and tight credit imposed by a banking system still reeling from the financial crisis have kept a lid on prices.
"There is little reason to think that inflation will get out of control any time soon," said Joel Naroff, chief economist at Naroff Economic Advisors.
Tuesday's report on wholesale prices was just the latest sign. Last week, the government said the Consumer Price Index was unchanged in July. And over the past 12 months, the CPI fell 2.1 percent, the biggest decline in nearly 60 years. Excluding food and energy, consumer prices posted a moderate 1.5 percent rise over the past year, well within the Fed's comfort zone for inflation.
Once an economic recovery begins to take hold and retailers begin dropping the promotions they are now using to entice shoppers, Naroff said wholesale and consumer prices likely will turn back up. But Bethune said inflation pressures are unlikely to be a concern for at least a year.
Some may worry about deflation - a dangerous period of falling prices that can also drive wages down. But most economists said deflation remains a remote threat. The last deflationary period in the U.S. occurred in the 1930s during the Great Depression.
"Deflation-worriers will find some cause for concern in the general picture, though the broad pattern remains one of gently oscillating monthly price changes," Pierre Ellis, senior economist at Decision Economics, wrote in a note to clients.
Last week, the Fed concluded a meeting by saying it expects "inflation will remain subdued for some time." It left a key interest rate at a record low near zero and said the sluggish economy would likely keep rates unusually low "for an extended period."
Many economists expect the Fed will keep its federal funds rate at its current level of zero to 0.25 percent for at least another year and possibly through 2010.
When the Fed does start raising rates, it will be with gradual increases, given the expectation for a slow and halting recovery, with little risk of serious inflation. Many economists think the jobless rate, now 9.4 percent, won't peak until sometime next summer, most likely above 10 percent. Rising unemployment leaves workers with little or no bargaining power to win pay increases.
On Wall Street, better-than-expected earnings reports from retailers Home Depot Inc. and Target Corp. helped bolster stocks. The Dow Jones industrial average added nearly 83 points to 9,217.94, following a 186-point drop on Monday triggered by lingering worries about consumer spending.
Also Tuesday, the Commerce Department said construction of homes and apartments fell 1 percent last month to a seasonally adjusted annual rate of 581,000 units. But the drop reflected weakness only in apartment construction. Economists were encouraged by the fifth straight monthly gain in single-family home building, a 1 percent rise that pushed such activity to its highest level since October.
The 0.9 percent fall in wholesale prices in July came after a 1.8 percent surge in June, which had been the biggest one-month increase since November 2007. Economists had viewed that gain as a temporary spike led by a jump in energy prices and not a sign of worrisome inflation.
For July, wholesale energy prices fell 2.4 percent, after having surged 6.6 percent in June. Food prices declined 1.5 percent, reversing a 1.1 percent rise in June. Big drops in gasoline and vegetable prices contributed to the declines.
The drop in core wholesale inflation reflected a 1.7 percent fall in prices for passenger cars. That was the biggest decline in car prices in nearly three years.
Economists say energy prices have leveled out and will remain stable for the rest of the year. Crude oil prices topped $72 a barrel in June and settled at about $69 per barrel Tuesday.
After hitting a record $147 a barrel in July 2008, oil prices slid for most of the rest of last year, a decline that trimmed earnings at oil companies. Major oil companies, including Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell and French petroleum giant Total SA, have reported second-quarter profit declines of more than 50 percent.
Copyright 2009 The Associated Press.