NEW YORK (CNN/Money) -
Falling gas prices reduced the overall measure of prices paid by consumers in July, according to a government report Tuesday, as inflation was far less than Wall Street's expectations for the month.
The Labor Department's consumer price index, which is the broadest measure of prices paid by consumers, fell 0.1 percent in the month, compared with a 0.3 percent gain in June. Economists surveyed by Briefing.com were forecasting a 0.2 percent rise.
The so-called "core CPI," which excludes often-volatile food and energy costs, showed a 0.1 percent increase after only a 0.1 percent rise in June. Economists were also forecasting a 0.2 percent rise in that inflation measure in the month.
Gasoline prices fell 4.7 percent in the month from peak levels reached in June. That led to a 1.9 percent decline in overall energy costs. But they weren't the only categories showing declines. Apparel prices were off 0.8 percent, transportation costs were also down 0.8 percent, while recreation prices fell 0.2 percent. Education and communication prices fell 0.1 percent.
The inflation report is closely watched by investors and economists for a sign of the direction of interest rates.
Bond prices rose and the yield, which moves in the opposite direction, fell to 4.24 percent on the 10-year bond Tuesday following the report, on the belief that low inflationary pressures might allow the Federal Reserve to pause on its policy of raising interest rates.
"This is very good news from an inflation standpoint," Robert MacIntosh, chief economist at Eaton Vance, told Reuters. "I think it helps bonds because low inflation is good for bonds. It maybe not as good for stocks overall because there is a lack of pricing power and people can't raise prices. It will make the Fed less likely to raise rates."
But others suggested that the report won't stop the Fed from its stated policy of measured interest rate hikes in coming months.
"Clearly good numbers, reinforcing the Fed view that much of the spring rise in inflation was 'transitory' - but good CPI numbers alone will not stop rates rising slowly," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Services, such as rent and medical care, saw a 0.3 percent rise. But the price of goods other than food and energy declined 0.3 percent in the month, following being unchanged in June and up only 0.1 percent in May.
Economist Mark Vitner of Wachovia said these numbers show that inflation is not much of a threat to the economy, and that the signs of inflation early in the year were a result of businesses scrambling to catch up with demand.
"Demand was growing when inventories were at a low point," he said. "In the past seven months production has been growing faster than consumption. That's led to an increase in inventories and reduction of inflationary pressures."
The decline in overall prices are could also be short-lived. Crude oil prices have been steadily rising to record levels in recent weeks, and gasoline prices which have been falling are expected to turn higher again soon, according to gasoline analysts.
But Vitner said even with energy prices rising, there's no sign that the more closely watched core-CPI is going to pose much of a threat in the near term.
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