updated 8/17/2004 8:54:58 AM ET 2004-08-17T12:54:58

Consumer prices, which have been buffeted this year by soaring energy costs, fell by 0.1 percent in July as gasoline costs posted their biggest decline in eight months, the government reported Tuesday.

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The Labor Department said the decline in its closely watched Consumer Price Index was the first decrease since a 0.2 percent drop last November, a decline which also reflected a decline in energy costs. The CPI had been up 0.3 percent in June and an even sharper 0.6 percent in May, reflecting big jumps in energy costs.

Excluding energy and food, consumer prices rose a tiny 0.1 percent in July, matching the June increase.

Through the first seven months of this year, consumer prices have been rising at an annual rate of 4.1 percent, sharply higher than the 1.9 percent increase for all of 2003.

However, this acceleration reflects a big jump in energy prices. So far there have been few indications that price pressures in this area are threatening to turn into a general inflation problem.

The core rate of inflation, which excludes volatile energy and food prices, has been rising at a more moderate annual rate of 2.4 percent, up from a tiny 1.1 percent increase in 2003.

The Federal Reserve last week boosted a key short-term interest rate for a second time this year but continued to signal that future rate increases should take place at a gradual pace unless inflation threatens to become more of a problem.

Analysts said that energy represents the biggest wild card that could endanger the current recovery. Crude oil pushed through the $45 per barrel level for the first time last week, hitting a record $46.58 in trading on Friday, reflecting worries about increased violence in Iraq and other threats to supplies.

However, prices retreated a bit on Monday, dropping to $46.05 per barrel after President Hugo Chavez of Venezuela, a major world oil supplier, survived a recall election.

Housing starts surge
In other good economic news, the Commerce Department reported Tuesday that construction of new homes and apartments rose by 8.3 percent in July.

The bigger-than-expected gain pushed housing construction to an annual rate of 1.978 million units last month, making up the lost ground from a 7.7 percent decline in housing starts in June.

Even though the Federal Reserve has begun raising interest rates to keep inflation under control, mortgage rates have remained at still attractively low levels.

The 0.1 percent decline in consumer prices last month reflected a 1.9 percent drop in energy prices, which had posted sharp increases of 2.6 percent in June and 4.6 percent in May.

Gasoline prices actually fell by 4.2 percent in July, the biggest decline since a 5.1 percent drop in November.

However, energy costs are likely to continue to be buffeted by uncertain geopolitical events. The Lundberg Survey showed that prices last Friday had dropped by nearly 5 cents in the past three weeks with the nationwide average falling to $1.90 per gallon, down significantly from the peak at slightly more than $2.10 per gallon in mid-May.

But analysts cautioned that gasoline prices could head higher in coming weeks depending on whether there are further global supply disruptions or increased worries about events in Iraq.

Food prices in July edged up a modest 0.2 percent, matching the June advance, with both months far below a sharp 0.9 percent gain in May. Last month, the price of dairy products, fresh fruits and fresh vegetables were all down.

The small 0.1 percent rise in inflation pressures outside of food and energy reflected a big 0.8 percent decline in clothing costs, the biggest drop in more than three years.

That helped to offset a 0.3 percent rise in medical costs and a 0.2 percent increase in housing costs.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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