updated 7/19/2006 11:31:12 AM ET 2006-07-19T15:31:12

Consumer inflation slowed in June, helped by a temporary drop in energy prices. But the improvement was expected to be short-lived with a new crisis in the Middle East pushing crude oil to record highs.

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The Labor Department reported that its closely watched Consumer Price Index rose by just 0.2 percent in June, the smallest increase in four months and just half of the 0.4 percent May rise.

The overall increase was in line with expectations although core inflation, which excludes energy and food, rose by 0.3 percent in June, higher than the 0.2 percent Wall Street had been expecting. That increase left core inflation rising for the past three months at an annual rate of 3.6 percent, far above the Federal Reserve comfort zone of 2 percent or less.

The Federal Reserve has raised interest rates 17 consecutive times in an effort to slow the economy enough to keep inflation under control. But there is evidence that the relentless rise in energy costs is beginning to spill over into more widespread inflation problems.

Fed Chairman Ben Bernanke, who was delivering the Fed’s semiannual report on monetary policy to Congress on Wednesday, sent financial markets tumbling back in early June when he called the pickup in core inflation unwelcome.

Investors are worried that the Fed could go too far in raising rates in its efforts to battle inflation. That would raise the prospects of a more severe economic slowdown and possibly even a recession.

The 0.2 percent increase in inflation in May reflected a 0.9 percent drop in energy prices, the first decline for energy costs in four months.

Gasoline prices fell by 1 percent last month, the best showing since February. But prices in recent weeks have been rising again as global crude oil prices surge to new record highs, threatening to hit the $80 per barrel mark with the fighting in the Middle East.

Food costs were up 0.3 percent in June with declines in beef, pork and fresh vegetables offset by increases in poultry and fresh fruits.

Outside of food and energy, the 0.3 percent increase in core inflation marked the fourth straight month that core inflation has risen by 0.3 percent.

One of the biggest increases in the core inflation categories was a 3.1 percent jump in airline ticket prices, reflecting rising jet fuel costs.

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