Inflation was a no-show in July and likely will stay away for months to come, giving the Federal Reserve room to keep invigorating the economy with record-low interest rates.
That was the message economists took from a report Tuesday that wholesale prices fell over the past 12 months by the sharpest amount in 62 years of record-keeping -- the latest sign that inflation is posing no threat.
"In this economy, there really is no pricing power at all," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.
The Labor Department said wholesale prices sank 0.9 percent in July, triple the decline that economists had expected. Over the past year, wholesale prices have dropped 6.8 percent. That's the biggest drop in records dating to 1947.
A steep decline in energy prices drove the overall drop. But even apart from energy and food prices, which tend to be volatile, inflation was calm. The so-called "core" inflation rate for wholesale goods -- excluding food and energy -- fell 0.1 percent in July. And over the past 12 months, the core rate has ticked up a moderate 2.6 percent.
Economists expect inflation to remain tame as the economy struggles to mount a sustained recovery. High unemployment, wary shoppers and tight credit imposed by a banking system still reeling from the financial crisis have kept a lid on prices.
"There is little reason to think that inflation will get out of control any time soon," said Joel Naroff, chief economist at Naroff Economic Advisors.
Tuesday's report on wholesale prices was just the latest sign. Last week, the government said the Consumer Price Index was unchanged in July. And over the past 12 months, the CPI fell 2.1 percent, the biggest decline in nearly 60 years. Excluding food and energy, consumer prices posted a moderate 1.5 percent rise over the past year, well within the Fed's comfort zone for inflation.
Once an economic recovery begins to take hold and retailers begin dropping the promotions they are now using to entice shoppers, Naroff said wholesale and consumer prices likely will turn back up. But Bethune said inflation pressures are unlikely to be a concern for at least a year.
Some may worry about deflation -- a dangerous period of falling prices that can also drive wages down. But most economists said deflation remains a remote threat. The last deflationary period in the U.S. occurred in the 1930s during the Great Depression.
"Deflation-worriers will find some cause for concern in the general picture, though the broad pattern remains one of gently oscillating monthly price changes," Pierre Ellis, senior economist at Decision Economics, wrote in a note to clients.
Last week, the Fed concluded a meeting by saying it expects "inflation will remain subdued for some time." It left a key interest rate at a record low near zero and said the sluggish economy would likely keep rates unusually low "for an extended period."
Many economists expect the Fed will keep its federal funds rate at its current level of zero to 0.25 percent for at least another year and possibly through 2010.