Core consumer prices, which exclude volatile food and energy costs, ticked up 0.1 percent last month, the Labor Department said Wednesday. More expensive medical costs, clothing and rents pushed up core prices.
Prices increased 1.4 percent in the 12 months ending in July. That's down from 1.7 percent in June and is the smallest yearly increase in 20 months. Core prices have increased 2.1 percent in the past year, down from a 2.2 percent pace in June.
Lower inflation gives the Federal Reserve more leeway to launch new programs intended to rekindle the economy.
The Fed signaled at a meeting in late July that it is ready to act if growth and hiring stays weak. That led many economists to predict the Fed would announce a third round of bond purchases designed to push long-term interest rates down and generate more borrowing and spending in the economy.
But recent sign point to some economic improvement in July. Employers added the most jobs in five months, while consumers increased their retail spending after three months of declines. A slightly better outlook for the economy could prompt the Fed to hold off on taking action when its policy committee next meets in September.
Mild price increases also leave consumers with more money to spend, which can boost economic growth. Food prices increased only 0.1 percent in July.
But the low prices may not last. A severe drought in the U.S. Midwest has damaged corn, soybeans and other crops, which will likely push up a range of food prices on grocery store shelves in the coming months. Corn is used in many processed foods, from cereals to soda. And both corn and soybeans are used in animal feed, so higher costs for those grains will likely push up meat prices.
Wholesale food prices rose 0.5 percent in July for the second straight month, the government said Tuesday. Wholesale corn prices jumped 34.5 percent, the largest gain since Oct. 2006.
Gas prices have also increased recently after falling from a peak near $4 a gallon in April. The average national price for gas was $3.71 a gallon on Wednesday. That's up 31 cents from a month ago.
Slow economic growth is keeping a lid on price increases. The economy expanded at just a 1.5 percent annual rate in the April-June quarter, down from 2 percent in the January-March quarter and 4.1 percent in the final three months of last year.