msnbc.com news services
updated 6/15/2011 2:37:35 PM ET 2011-06-15T18:37:35

Americans paid more for food, cars and clothing in May. But overall consumer prices rose by the smallest amount in six months, slowed by the first drop in energy costs in nearly a year.

Consumer Price Index rose 0.2 percent in May, the Labor Department said. That's down from April's 0.4 percent increase. Food costs rose 0.4 percent. But energy costs fell 1 percent.

So-called "core" prices, which exclude volatile food and energy, rose 0.3 percent, the most in nearly three years.

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Separately, a gauge of manufacturing in New York State showed the sector unexpectedly contracted in June, falling below zero for the first time since November 2010 in another sign the economic slowdown could become more protracted.

The New York Federal Reserve said its "Empire State" general business conditions index fell to minus 7.79 from positive 11.88 the month before. Economists polled by Reuters had expected a gain to 12.50.

Another report Wednesday showed U.S. industrial output edged up just 0.1 percent in May as supply chain disruptions from the earthquake in Japan disrupted auto production for a second straight month.

The Federal Reserve said that, despite a 1.5 percent drop in auto production, manufacturing output rose 0.4 percent as factories made up for production lost in April because of tornadoes in the South. Overall industrial production was also supported by a 0.5 percent gain in mining production, the Fed said. Economists had looked for a 0.2 percent increase in industrial output.

Consumer prices rose 3.6 percent from April 2010 through May 2011, the biggest one-year gain since October 2008. Excluding the volatile food and energy categories, which account for about 20 percent of the index, so-called "core" prices rose only 1.5 percent in that same period. That's below the Federal Reserve's informal inflation target of about 2 percent.

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.

But higher food and gas prices have slowed growth this year. Consumers have had to spend more at the grocery stores and to fill their tanks, leaving less money for spending on other goods and services, like appliances, furniture and vacations, that drive the economy.

There are signs that those prices are easing, and if they fall further, that could lift consumer spending and boost growth in the second half of the year.

Major Market Indices

Gas prices reached a national average of $3.98 per gallon May 6, driven higher by overseas demand and turmoil in the Middle East. Since then, the average price has fallen to just under $3.70. That's still $1 higher than a year ago.

Wholesale food prices, meanwhile, fell 1.4 percent in May, the steepest drop in nearly a year, the government said Tuesday. Much of that decline resulted from a sharp fall in vegetable and fruit prices. Most economists expect overall food prices to stabilize later this year.

Changes in grain and corn prices take longer to filter down to grocery stores than changes in oil prices do to gas stations. That's because grains and other commodities represent a smaller fraction of food costs in the U.S. than in other countries. By contrast, oil prices are the biggest factor in the cost of gas.

Corn, wheat and other agricultural commodities have risen sharply in price since last summer. Bad weather in several countries and rising demand in fast-growing developing markets are to blame. But those increases have slowed in recent months.

Slower inflation would leave Americans with more money to spend to stimulate the economy, including keeping more of a cut in Social Security taxes that took effect in January. Economists expect the increased spending to raise overall economic growth to an annual rate of 3 percent in the second half of this year. In the first three months of this year, it was 1.8 percent.

A report late Monday by the U.S. Agriculture Department showed that the corn crop has weathered recent flooding along the Mississippi River better than many analysts expected. That sent corn prices down 27 cents to $7.56 a bushel on Tuesday, though that is still more than double what it was a year ago.

Federal Reserve Chairman Ben Bernanke has said that the rise in food and gas prices would likely be temporary. The central bank has also said it is watching closely for any signs of persistent inflation.

The Associated Press and Reuters contributed to this report.

Video: Core consumer inflation rises

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