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Drop in wholesale prices could keep interest rates stable

WASHINGTON - Wholesale prices fell for a second straight month in May, the first time that has happened in a year, reflecting big declines in the cost of energy and food.

The Labor Department said Wednesday that wholesale prices dropped 0.3 percent in May following a 0.1 percent decline in April. Core inflation, which excludes energy and food, rose 0.2 percent. Core prices are up just 1.3 percent over the past year.

The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to support the economic recovery. Many economists believe the Fed will not start raising rates until sometime next year, believing that the severe recession of 2007-2008 will keep inflation a no-show for the rest of this year.

"A still-considerable amount of excess capacity in the economy will keep price pressures modest," predicted Jennifer Lee, senior economist at BMO Capital Markets.

Paul Ashworth, senior U.S. economist at Capital Economics, said that upcoming inflation reports should show continued price moderation, reflecting the big declines occurring in gasoline and other energy prices.

Ashworth said even with the price declines there was no danger that the country would topple into a period of sustained deflation, something not seen in the United States since the Great Depression of the 1930s.

In May, energy prices fell 1.5 percent, the biggest drop since a 2.2 percent decline in February. Gasoline prices were down 7 percent while home heating oil fell 7.4 percent and residential natural gas was down 1.1 percent. The lower prices reflect a continued decline in global oil prices, which have been falling because of concerns that the European debt crisis will dampen growth prospects in a key region of the world.

Falling energy costs are expected to keep inflation low in June as well, given that gasoline costs in June are down significantly from a month ago. Food costs dropped 0.6 percent, the biggest decline since a 1.3 percent fall in July of last year. - AP

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