WASHINGTON (AP) -- Consumer prices rose by a modest 0.2 percent in July for the second month in a row, easing fears that the country could be heading for deflation, an economically dangerous slide in prices.
The Consumer Price Index, the government's most closely watched inflation barometer, suggested that the nation's pricing picture is fairly stable -- that neither an upward spiral in inflation nor a downward price spiral is in the offing.
Excluding energy and food prices, which can swing widely from month to month, "core" consumer prices also rose by 0.2 percent in July, compared with a flat reading in June, the Labor Department reported Friday.
The latest snapshot of the CPI matched economists expectations. But the showing on core prices in July was slightly stronger than the 0.1 percent increase analysts were forecasting.
Amid signs that the economy is gaining traction, the Federal Reserve decided Tuesday to leave a key short-term interest rate at a 45-year low of 1 percent and hinted it may stay there for some time.
With the Fed more concerned about inflation going down, rather than up, the central bank has leeway to hold the funds rate at low levels for awhile even if the economy picks up speed in the second half of this year, economists said.
The Fed has said repeatedly that it must be on guard against even a remote threat of deflation because of its potential to wreck the economy. "The probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level," the central bank said Tuesday.
For the first seven months of this year, consumers prices rose at an annual rate of 2.2 percent, compared with a 2.4 percent increase for all of 2002. Core prices so far this year advanced at an annual rate of 1.2 percent, slower than the 1.9 percent increase for all of last year.
In July, energy prices went up 0.4 percent, down from a 0.8 percent rise the month before. Falling prices for electricity and natural gas in July helped to blunt rising prices for gasoline and fuel oil.
Food prices nudged up just 0.1 percent in July, representing a moderation from June's 0.4 percent advance. Falling prices for vegetables and poultry tempered rising prices for fruits, pork and beef in July.
Elsewhere in the report: Airline fares went up 1.6 percent. Costs for medical care rose 0.5 percent in July, the largest increase since November, putting a strain on Americans' pocketbooks and wallets.
But computer prices fell 1.7 percent in July; new automobile prices edged down 0.1 percent and clothing prices were flat.
The current economic climate makes it difficult for some companies to raise prices, which is a benefit for consumers, but can squeeze producers' profit margins.
Economists believe the economy will regain strength in the second half of this year, with some estimating economic growth clocking in at an annual rate of 3.5 percent or 4 percent or more.
Businesses want profits to improve and want to be sure the recovery is vigorous before they step up capital investment and hiring, economists said. Those are two key ingredients for the economy to get back to full throttle.