The Consumer Price Index, the government's most widely used inflation gauge, rose a smaller than expected 0.1% in June for the 4th month in a row.
"If inflation is lurking out there, it's certainly hiding itself very well," said economist David Wyss of DRI/McGraw-Hill Inc. in Lexington, Mass.
So far this year, falling energy costs and tepid food price increases have limited the CPI's rise to an annual rate of just 1.4%, the smallest gain for the first half of a year since 1986. Last year the CPI rose 3.3%.
The so-called core rate of inflation, excluding volatile food and energy costs, also rose only 0.1% last month, the department said. In the first half of 1997, the core rate rose at a 2.4% annual rate, the slowest in 32 years.
The report cheered financial markets as investors saw an economy in its 7th year of growth without any serious threat of a pick-up in inflation.
Workers also had something to cheer about. A separate department report showed that average weekly earnings, after adjusting for inflation and seasonal factors, rose 0.5% in June from May and were up 1.3% from a year ago.
With little upward wage pressure despite tight labor markets and producer prices down for six months in a row, most economists still see no inflation on the horizon, even if economic growth picks up in the 2nd half of the year.
"It's clear what we're seeing is that we can enojoy healthy economic growth, low unemployment rates and very low inflation," said economist Mickey Levy of NationsBanc Capital Markets Inc.
Price increases are being held in check by productivity gains and the Federal Reserve's ability to hold down spending through its monetary policy, limiting businesses' ability to raise prices without losing market share, he said.
"The bottom line is people who persist in saying that inflation has to rise when the economy is strong are using a framework that doesn't work," said Levy.
But economist Robert Brusca at Nikko Securities Co. said inflation will start to pick up as the recent drop in energy prices subsides, labor markets tighten further and the housing market continues to heat up as interest rates recede.
"I think this is about as good as it gets," said Brusca. "We're looking at stronger growth and more inflation in the 2nd half of the year."
The June rise in consumer prices reflected higher housing and entertainment costs offset by mostly lower transportation and clothing costs and flat energy prices.
Food prices rose 0.2% last month after a 0.4% rise in May. Fresh vegetable prices rose 2.4%, pork rose 1% and fresh fruits fell 1%.
Energy costs were unchanged last month after falling sharply over the previous three months. Gasoline prices tumbled 0.9% and home heating oil fell 0.7%, while natural gas and electricity costs rose.
New car prices dropped 0.1%, used cars fell 1.8% and airline fares fell 1.2%, but overall transportation costs fell 0.3% in June.
Medical costs rose 0.2% in June after a 0.3% rise in May and were up 2.9% over the past 12 months.
Tobacco prices fell 0.9% in June, the cost of clothing fell 0.2% and entertainment costs rose 0.5% last month.
Service costs, which make up more than half of the overall CPI, rose 0.3%, while commodities fell 0.1%.
The Consumer Price Index stood at 160.3 in June, meaning that a basket of goods that cost $100 in the 1982-84 period cost $160.30 last month.
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