WASHINGTON -- Higher prices for gasoline and airline fares helped nudge consumer prices a modest 0.3 percent higher in July, the Labor Department reported Tuesday, in line with expectations and a further sign that inflation remains muted in a vibrant economy.
The July increase was the first in three months. The "core" index, which excludes the volatile food and energy components, rose 0.2 percent after increases of 0.1 percent in both May and June.
Financial markets rallied after the report was released. The Dow Jones industrial average gained more than 50 points in the first few minutes of trading and ended the day up 70.29 points to close at 11,117. The benchmark U.S. Treasury 30-year bond rose a full point, with the yield, which moves in the opposite direction, falling to 6.01 percent.
Economists cheered the news, the last significant economic report before Federal Reserve policymakers meet next week to consider whether to raise interest rates.
"It kind of underscores the notion that inflation remains pretty subdued right now," said Nomura Securities economist David Resler. "There's really not much deviation from recent trends."
While some said they still expect Fed officials to raise interest rates on Aug. 24, there was hope the latest batch of benign inflation numbers means policymakers will stop at just one more rate increase. At their last meeting June 30, Fed policymakers raised their target for the overnight bank lending rate to 5 percent from 4.75 percent.
But Stephan Thurman, deputy chief economist at the U.S. Chamber of Commerce, said the latest inflation numbers mean Fed chairman Alan Greenspan and his colleagues need not raise rates next week.
"Mr. Greenspan, where's the inflation?" Thurman said. "They don't have a justification, much less an excuse."
Partly in anticipation of Fed action, market interest rates have been on the rise the past few months and some analysts said the rise in mortgage and other borrowing costs will eventually bring about the slowdown in the economy desired by the Fed.
"It looks like we may be developing a scenario where they tighten a little bit next week and that's all," said William Kirby, a senior bond trader at Prudential Securities. "The market has done a lot of tightening for the Fed already."
So far this year, the CPI has risen at an annual rate of 2.4 percent. While that is 50 percent above last year's 1.6 percent rate of growth, it is still low by historic standards. Much of the increase in the index can be attributed to a rebound in energy prices from their 30-year lows of last year.
Energy costs rose 2.1 percent in July, accounting for nearly half of the overall CPI increase. Energy prices are running 12.4 percent higher this year, on an annualized basis, than last year.
The rise in airline fares, of 6.5 percent in July, surprised some economists, but they suggested it partly reflects increases in fuel costs paid by the airlines.
Food and beverage prices rose 0.2 percent last month, after being unchanged in June. Clothing prices fell 0.9 percent, after falling 0.4 percent in June.