Producer prices largely flat in July, helped by gas drop

Josa Luis GutiArrez | E+ | Getty Images

U.S. producer prices were flat in July and pointed to very little inflationary pressure in the economy, which could add to worries at the U.S. Federal Reserve that inflation is running too low.

The Labor Department said on Wednesday a drop in natural gas and gasoline costs held back its seasonally adjusted producer price index. Analysts polled by Reuters had expected a 0.3 percent increase.

But it was the weakness in the index outside of volatile energy and food components that will likely garner more attention at the Fed, which has recently flagged the risks posed to the economy by low inflation.

These so-called "core" prices rose 0.1 percent during the month, below the 0.2 percent gain expected by analysts in a Reuters poll.

Extremely low inflation is scary because it raises the risk a major shock to the economy could send prices and wages into a downward spiral known as deflation. Fed Chairman Ben Bernanke pointed out this risk in July. Low inflation also encourages businesses and consumers to put off purchases.

Inflation has been trending lower for much of the last year despite signs of growing strength in the broader economy. Bernanke has argued that temporary factors could be behind some of the weakness in inflation.

The core index was up 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected that reading to fall to 1.4 percent from 1.7 percent in June.