U.S. prices rise by most since March

Economists say prices are not likely to rise much higher. Gas prices have come down this month and are expected to drop further. And retailers are reluctant to charge more when unemployment is high and consumers are already spending cautiously.

But the price increases could make it harder for Federal Reserve Chairman Ben Bernanke to rally support for another program to purchase Treasury bonds, which is intended to keep interest rates low but has been criticized for spurring higher inflation.

Over the past 12 months, prices have risen 3.6 per cent. That's equal to the 12-month increase in May and June. But core prices over the past 12 months have gone up 1.8 per cent — the largest increase in two years.

Some inflation can be healthy for the economy because it encourages people to spend and invest rather than sitting on their cash. More spending drives corporate growth, which makes businesses more likely to hire people.

Economists expect core prices will likely continue to rise this year, then fall back next year.

With unemployment high and consumer demand low, “a sustained rise in core price pressures is just not possible,” said Paul Dales, an economist at Capital Economics.

Gas prices increased last month by a seasonally adjusted 4.7 per cent after dropping sharply in June.

Clothing prices rose 1.2 per cent in July. That was the third straight increase, reflecting higher cotton prices. Over the past 12 months, clothing costs have risen 3.1 per cent, the largest annual increase since July 1992.

Higher rents and pricier hotel rooms have pushed the cost of housing up by the most in three years.

Food prices rose 0.4 per cent. The cost of meat, dairy, coffee and fruits and vegetables all increased.

The Labor Department said Wednesday that core wholesale prices rose 0.4 per cent in July, the most in six months. That's twice the increase in core consumer prices. The difference suggests that retailers are reluctant to pass on all their higher costs to consumers. That could restrain inflation going forward.

Higher gas and food costs sent consumer prices sharply higher this year, stoking inflation fears. But core prices, which exclude volatile food and energy costs, have been much tamer. The 1.8 per cent annual increase reported in July is within the Federal Reserve's informal target range of between 1.5 per cent and 2 per cent.

Fed policymakers expect core consumer inflation to average between 1.5 per cent and 1.8 per cent this year.

Oil and gas prices have fallen in recent weeks, in response to concerns that growth in the United States and Europe will be weak this year. Americans are also driving less, reducing demand for gasoline.

Falling oil and gas prices should help keep inflation in check. The average nationwide price of gas fell to $3.58 a gallon Wednesday, down about 9 cents from a month earlier.

Lower inflation gives the Federal Reserve more leeway to keep interest rates low and potentially engage in other efforts to boost the economy.

Last week, Fed policymakers said they will keep its benchmark short-term rate at nearly zero at least until mid-2013. Previously, the central bank had never given a clear time frame. It hopes the certainty of low rates will encourage consumers and businesses to borrow and spend more.