updated 8/18/2009 1:57:05 PM ET 2009-08-18T17:57:05

Wholesale prices dropped sharply in July, and over the past 12 months fell by the largest amount in more than six decades of record-keeping.

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The Labor Department said Tuesday that wholesale prices dropped 0.9 percent last month. That's triple the decline economists had expected and was driven by big decreases in both energy and food costs. Over the past 12 months, the prices of goods before they reach store shelves fell 6.8 percent.

Core inflation, which excludes energy and food, also was well-behaved. It dropped 0.1 percent in July, better than 0.1 percent gain economists expected.

With inflation under control, some may worry about a dangerous bout of falling prices that can also drive wages down, but most economists said deflation remains a remote threat. The last period of deflation 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, rather than sustained tip into decline," Pierre Ellis, senior economist at Decision Economics, wrote in a note to clients.

Meanwhile, housing starts and applications for future projects both dipped unexpectedly last month, a sign that the building industry's recovery from the prolonged housing slump is likely to be bumpy and gradual.

The Commerce Department said new construction fell 1 percent in July to a seasonally adjusted annual rate of 581,000 units. Economists expected a pace of 600,000 units. Applications for building permits, an indicator of future activity, fell 1.8 percent to an annual rate of 560,000 units, also below economists' estimates of 580,000 units.

The declines in the Producer Price Index showed wholesale inflation pressures were even more subdued than prices at the consumer level. The government last week reported that the Consumer Price Index was unchanged in July and over the past 12 months fell 2.1 percent, the biggest decline in nearly 60 years.

For July, wholesale energy prices fell 2.4 percent after having surged 6.6 percent in June. Gasoline dropped 10.2 percent and home heating oil plunged 11.9 percent.

Food prices at the wholesale level fell 1.5 percent last month, reversing a 1.1 percent rise in June. A big drop in vegetable prices led the overall decline, but beef and egg prices also fell.

The 6.8 percent decline in wholesale prices over the past year was the biggest since the government began keeping such records in 1947. It surpassed the 5.2 percent drop in the period ending in August 1949.

The 0.1 percent drop in core inflation left those prices rising 2.6 percent over the past 12 months. In July, prices for passenger cars fell 1.7 percent, the biggest decline in nearly three years.

On Wall Street, stocks rose a bit in morning trading following gains in overseas markets driven by upbeat economic news from Germany, Europe's largest economy. The Dow Jones industrial average added about 60 points and broader indices also rose.

The 1.8 percent gain in wholesale prices in June was the biggest one-month increase since November 2007. But economists said it represented a temporary burst and was not the beginning of a dangerous bout of spiraling prices.

Economists believe energy prices, which had propelled much of the gain, will level out and that the weak economy will keep the lid on overall inflation. Crude oil prices topped $72 a barrel in June but were trading below $67 per barrel Tuesday.

After hitting a record at $147 per barrel in July 2008, oil prices slid for most of the rest of 2008, a decline that trimmed earnings at oil companies. Many major oil companies, including Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell and French petroleum giant Total SA, recently reported second-quarter profit declines of more than 50 percent.

The Federal Reserve believes inflation will remain subdued for some time as the country struggles to emerge from the worst recession since World War II.

The Fed last week they planned to keep a key bank lending rate at a record low near zero for an "extended period," despite seeing signs that the economic downturn was "leveling out."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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