Published: Thursday, 16 Jul 2009 | 3:36 AM ET

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U.S. consumer prices rose at a slightly faster-than-expected 0.7 percent pace in June, but the bulk of the increase was due to soaring gasoline prices and the core measure of inflation remained relatively tame, government data on Wednesday showed.

The Labor Department said the rise in the Consumer Price Index was the largest since July 2008. Wall Street analysts polled by Reuters had forecast a 0.6 percent increase, compared with the 0.1 percent gain reported in May.

Gasoline prices jumped 17.3 percent last month, the largest increase since September 2005, and explained the bulk of the increase in the headline index, the Labor Department said.

Compared to the same period last year, consumer prices fell by 1.4 percent, which was the biggest decline since January 1950, when prices fell 2.1 percent, a Labor Department official said. Gasoline prices compared with a year ago were 34.6 percent lower.

Stripping out volatile energy and food prices, the closely watched core measure of consumer inflation rose by 0.2 percent in June, which was slightly more than the 0.1 percent forecast increase. Core prices compared with a year ago rose 1.7 percent, the smallest rise since a matching gain in January.

Manufacturing Improves

In other economic news, the slumping factory sector in New York state nearly pulled out of contraction in July, posting the highest reading in more than a year as new orders surged, the New York Federal Reserve said on Wednesday.

The New York Fed's "Empire State" general business conditions index rose to minus 0.55 in July from minus 9.41 in June.

July's result was the strongest since April 2008's reading of 0.81, which was the last time it was in positive territory.

It also exceeded economists' expectations of minus 5.0, based on the median of forecasts in a Reuters poll.

"The number was a decent number, showing that in the New York region, manufacturing was only slightly contracting in July," said Gary Thayer, senior economist at Wells Fargo Advisors in St. Louis.

"We saw some positive numbers on orders and shipments, the first we had seen in a long time, which suggests that maybe the manufacturing sector is turning a corner. It's still a tentative sign, but consistent with other reports showing that the recession may be near an end."

The improvement came as the inventories index fell to minus 36.46—a record low, according to the New York Fed. In June it was at minus 25.29.

Economists have expected plummeting inventories to lead to a rebound in production and possibly help pull the U.S. economy out of the worst recession in decades.

Concerning inflation, the July survey showed the prices paid index jumped to 10.42 from minus 5.75, hitting their highest since November 2008.

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The Empire State index was launched in July 2001.

Industrial Product Drops 0.4%

In another report, U.S. industrial production fell a smaller-than-expected 0.4 percent in June, according to Federal Reserve data Wednesday that suggested the pace of recession eased in the second quarter.

Economists polled by Reuters had expected a 0.6 percent decline in industrial production, after a 1.2 percent drop in May, initially reported as a 1.1 percent fall.

For the second quarter as a whole, output fell at an annual rate of 11.6 percent, a more moderate contraction than in the first quarter when production fell at 19.1 percent rate.

The capacity utilization rate, a measure of slack in the economy, fell to 68 percent, the lowest level on records dating back to 1967.

Both manufacturing and mining output fell, while production from utilities increased.

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