By Jason Lange
WASHINGTON (Reuters) - 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, which are seen as indicators of trends in inflation, rose 0.1 percent during the month, below the 0.2 percent gain expected by analysts in a Reuters poll.
The report helped push yields lower on long-term U.S. government debt, suggesting investors saw it as a sign the Fed might keep a major economic stimulus program in place for longer.
Inflation has been trending lower for much of the last year despite signs of growing strength in the economy, and the Fed warned last month that low inflation could hurt the economy.
Wednesday's data showed 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.
Low inflation is worrisome because it can encourage businesses and consumers to put off purchases. This undermines the Fed's efforts to boost consumption by lowering borrowing costs.
Policymakers also fear extremely low inflation 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.
However, Bernanke has argued that temporary factors could be behind some of the weakness in inflation, and many private sector economists agree.
A steady fall in the unemployment rate appears to have the Fed nearly ready to begin unwinding a bond-buying stimulus program.
Many economists expect the Fed will begin reducing its monthly bond purchases in September. This has led to an increase in interest rates for home mortgages, although another report on Wednesday showed mortgage rates fell slightly last week.
(Reporting by Jason Lange; Editing by Chizu Nomiyama)