Inflation index is flat in June as energy prices drop

— -- Inflation stayed cool in June, as the falling price of gasoline outweighed the a slight pickup in the cost of food.

The consumer price index was unchanged for the month, the Labor Department reported this morning. That includes a 1.4% drop in the cost of energy and a 0.2% rise in food prices. The rest of the index, known as the core inflation rate, rose 0.2%. Core inflation for the last 12 months was 2.2%, the department said.

The inflation data has been one of the few bright spots in recent economic news. Retail sales dropped for a third month in June, while data from the Institute of Supply Management suggest the manufacturing sector is shrinking for the first time since 2009.

Even so, inflation still isn't low enough to suit everyone.

"Stubborn is the exact right word,'' said Drew Matus, an economist at investment bank UBS in New York. "The core inflation rate doesn't seem to want to go down. Considering the weak economy you would expect core to go below 2%.''

Economists had expected inflation to be virtually nil for the month, according to a Bloomberg survey of 81 forecasts. Their core rate estimate was right on at 0.2% and 2.2% for the last 12 months.

Core inflation is being propped up by increases in health care costs, which rose 0.7% last month, and apparel, which saw 0.5% inflation in June, Matus said. No other category saw gains of more than 0.2%, the government said.

The news comes just before Federal Reserve Chairman Ben Bernanke is scheduled to testify before Congress on the state of the economy at 10 a.m. ET. Market analysts are watching closely for hints about whether the Fed will promise more monetary easing, a policy known as quantitative easing or QE- a prospect that becomes more likely if stays muted, Bank of America Merrill Lynch economist Ethan Harris said.

Most economists believe the Fed will begin another round of easing by the end of the year, though they disagree about how soon the central bank may act. September is the likeliest time, because the Fed's Open Market Committee declined to launch a new bond-buying operation to expand the money supply at its most recent meeting, said Harris.

The Fed doesn't have enough new information about the economy since that meeting to justify a change in policy yet, said Peter Fisher, global head of fixed income for asset manager Black Rock.

``My guess is that he's not going to make news,'' Fisher said. ``Absent a really profound shock in the economy, I think they won't do QE. I think they will hold it in reserve.''