NEW YORK (CNN/Money) - Wholesale prices in the United States dropped in July, the government said Thursday, indicating inflation continued to be a distant threat to an economy struggling to recover from recession.

The Labor Department said its producer price index, a measure of wholesale inflation, fell 0.2 percent in July after rising 0.1 percent in June. Excluding food and energy prices, PPI fell 0.3 percent after rising 0.1 percent in June. Economists expected PPI and core PPI each to rise 0.1 percent, according to Briefing.com.

"With the costs of materials going nowhere, productivity soaring and consumers still buying, producers should be able to fatten their bottom lines," said Joel Naroff, president and chief economist of Naroff Economic Advisors in Holland, Pa.

In a separate report, the Labor Department said the number of Americans filing new claims for unemployment benefits fell to 376,000 in the week ended Aug. 3 from a revised 391,000 the prior week. Economists, on average, expected 385,000 new claims, according to Briefing.com.

U.S. stock prices fell in early trade but have since rebounded, while Treasury bond prices were mixed.

The report comes in advance of Tuesday's meeting of Federal Reserve policy makers, who will discuss the central bank's target for short-term interest rates.

A number of Wall Street economists, worried about the impact of July's stock-market selloff on the broader economy and seeing recent signs of weakness, have begun to predict that the Fed will start cutting rates again this year to stimulate borrowing and spending.

Thursday's PPI report informs the Fed -- which must balance economic stimulation with controlling inflation -- that, by at least one measure, inflation is tame, and it shouldn't prevent it from cutting rates or keeping them low.

In fact, the drop in prices also raised the scarier possibility of deflation, in which businesses are unable to raise prices, even as the cost of labor rises. The result would be another slowdown in business spending and another round of layoffs, sinking the economy deeper into a recession that began early in 2001.

Still, July's decline in wholesale prices was mainly the result of a 1.5 percent drop in the price of autos and a 1.6 percent drop in the price of light trucks. Absent those declines, the price index for finished goods would have been flat, the Labor Department said.

"Goods prices are deflating and continue to deflate, but services prices are by no means deflating," said Merrill Lynch senior economist Gerald Cohen. "Overall, prices continue to rise, so I'm not concerned about deflation."