U.S. consumer prices increased slightly in July as rising food costs were offset by falling prices for a range of other goods, pointing to benign inflation that could make the Federal Reserve cautious about raising interest rates again this year.

The Labor Department said on Friday its Consumer Price Index edged up 0.1 percent last month after being unchanged in June. That lifted the year-on-year increase in the CPI to 1.7 percent from 1.6 percent in June.

Economists polled by Reuters had forecast the CPI rising 0.2 percent in July and climbing 1.8 percent year-on-year.
Stripping out the volatile food and energy components, consumer prices gained 0.1 percent for the fourth straight month. The so-called core CPI rose 1.7 percent in the 12 months through July and has now increased by that margin for three straight months.

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The modest gain in consumer prices, coming on the heels of a drop in producer prices in July, could worry Fed officials who have largely viewed the retreat in inflation as temporary.

Fed Chair Janet Yellen told lawmakers last month that "some special factors," including prices for mobile phone plans and prescription drugs, were partly responsible for the low inflation readings.

Prices of U.S. government debt rose after Friday's data while the dollar fell against a basket of currencies. U.S. stock index futures initially fell before reversing course to trade higher.

FED'S CONUNDRUM

The U.S. central bank has a 2 percent inflation target and tracks a measure that has been stuck at 1.5 percent since May. Inflation remains tame despite the labour market being near full employment, a conundrum for the Fed as it contemplates tightening monetary policy further.

The central bank is expected to announce a plan to start reducing its $4.2 trillion (£3.23 trillion) portfolio of Treasury bonds and mortgage-backed securities at its policy meeting next month. It is expected to delay its next rate hike until December while it monitors inflation. The Fed has raised borrowing costs twice this year.

Rental costs maintained their upward trend last month. The cost of mobile phone services fell 0.3 percent last month after decreasing 0.8 percent in June. Prices for apparel rose 0.3 percent after four straight months of declines.