Modest rise in US consumer prices may delay Fed rate hike

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WASHINGTON (Aug 11): US consumer prices increased slightly in July as rising food costs were offset by falling prices for a range of other goods, pointing to benign inflation that could make the Federal Reserve cautious about raising interest rates again this year.

The Labor Department said on Friday its Consumer Price Index edged up 0.1% last month after being unchanged in June. That lifted the year-on-year increase in the CPI to 1.7% from 1.6% in June.

Economists polled by Reuters had forecast the CPI rising 0.2% in July and climbing 1.8% year-on-year.

Stripping out the volatile food and energy components, consumer prices gained 0.1% for the fourth straight month. The so-called core CPI rose 1.7% in the 12 months through July and has now increased by that margin for three straight months.

The modest gain in consumer prices, coming on the heels of a drop in producer prices in July, could worry Fed officials who have largely viewed the retreat in inflation as temporary.

Fed Chair Janet Yellen told lawmakers last month that "some special factors," including prices for mobile phone plans and prescription drugs, were partly responsible for the low inflation readings.

Prices of US government debt rose after Friday's data while the dollar fell against a basket of currencies. US stock index futures initially fell before reversing course to trade higher.

FED'S CONUNDRUM

The US central bank has a 2% inflation target and tracks a measure that has been stuck at 1.5% since May. Inflation remains tame despite the labor market being near full employment, a conundrum for the Fed as it contemplates tightening monetary policy further.

The central bank is expected to announce a plan to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its policy meeting next month. It is expected to delay its next rate hike until December while it monitors inflation. The Fed has raised borrowing costs twice this year.

Last month, food prices rose 0.2%, driven by a surge in the cost of meat, fish, eggs, fruits and vegetables. Food prices were unchanged in June. The cost of food consumed at home increased 0.2% after dipping 0.1% in June.

While gasoline prices were unchanged after tumbling 2.8% in June, the cost of electricity increased 0.4%.

Rental costs maintained their upward trend last month. Owners' equivalent rent of primary residence rose 0.3% after advancing by the same margin in June.

The cost of mobile phone services fell 0.3% last month after decreasing 0.8% in June.

Prescription drug prices jumped 1.3% in July after increasing 1.0% in the prior month. Prices for apparel rose 0.3% after four straight months of declines.

The cost of new motor vehicles fell 0.5%, the biggest drop since August 2009 and the sixth consecutive monthly decline.