Aug. 15 (Bloomberg) -- Consumer prices in the U.S. rose 0.1 percent in July, the smallest gain in eight months, as Americans paid less for gasoline and food-cost increases slowed.

The figures, which matched economists' forecasts, give the Federal Reserve scope to reduce interest rates if the economy weakens. At the same time, there's little sign that the 9.4 percent drop in the Standard & Poor's 500 Index from July's record and more credit restrictions are causing growth to falter: Industrial production gained 0.3 percent in July, the Fed said today, and factory use rose.

``The economy is still performing well,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``Manufacturing is brisk and there is not much upward pressure on inflation. If the financial markets weren't in turmoil, the Fed would be solidly on hold.''

The increase in the cost of living followed a 0.2 percent advance in June, the Labor Department said today in Washington. Core prices, which exclude food and energy, climbed 0.2 percent for a second month and were up 2.2 percent from a year earlier.

The housing recession, which has slowed growth without stopping the expansion, shows no sign of abating. Confidence among homebuilders fell to a 16-year low this month as cancellations and lending restrictions took a toll.

The National Association of Home Builders/Wells Fargo index of builder sentiment declined to 22 in August, from 24, the Washington-based association said. A reading below 50 means most respondents view conditions as poor.

Market Influence

The reports had scant impact on financial markets. Two-year Treasury yields fell to a 22-month low on signs losses linked to U.S. subprime mortgages are widening. U.S. stocks fell after financing concerns sent Countrywide Financial Corp. to its steepest loss in 20 years.

So far this year, consumer prices are rising at a 4.5 percent annual rate, compared with a 4.7 percent rise in the same period in 2006. Core prices are gaining at a 2.3 percent pace, from 3 percent in the first seven months of last year.

Today's report showed energy prices fell 1 percent, the most since January, after declining 0.5 percent in June. Gasoline prices dropped 1.7 percent.

Food prices, which account for about a fifth of the CPI, rose 0.3 percent after a 0.5 percent increase in June.

``The Fed wants to be convinced that inflation is moderating, and I think that the CPI report does this,'' said Ryan Reed, an economist at National City Corp. in Cleveland. ``The global economy is well on track, and it seems as though our manufacturing sector is benefiting.''

Production Increases

The 0.3 percent gain in output at factories, mines and utilities followed a 0.6 percent increase in June that was more than initially reported. Capacity utilization, which measures the proportion of plants in use, grew to 81.9 percent, the highest since September, from 81.8 percent the prior month.

Companies are churning out more goods after working off excess inventories built up late last year. Growth in industrial output, fueled by rising exports and increased business spending, is helping the economy withstand a slump in the housing market.

Bentonville, Arkansas-based Wal-Mart cut prices in July by as much as half on 16,000 back-to-school items such as notebooks and pencils. The world's biggest retailer yesterday said second- quarter profit rose less analysts anticipated and lowered its earnings forecast for the year.

Wal-Mart's Chief Executive Officer H. Lee Scott said Americans face ``difficult pressure economically.''

Credit Restrictions

Lenders such as Wells Fargo & Co. and Wachovia Corp. are raising rates and imposing lending restrictions on some of their most creditworthy borrowers after a rout in the market for subprime mortgages. Subprime mortgages are sold to people with poor or sketchy credit histories.

Housing costs, which include some energy costs and account for two-fifths of the total consumer price index, advanced 0.2 percent after rising 0.3 percent. Owner's equivalent rent, which makes up 30 percent of the core CPI, increased 0.2 percent for a second month.

Medical-care costs rose 0.6 percent after increasing 0.2 percent. Clothing prices climbed 0.4 percent following a 0.6 percent decline. Auto prices were unchanged for a second month.

Almost 60 percent of the CPI covers prices that consumers pay for services ranging from airline fares to movie tickets and laundry charges.

The Fed's preferred inflation gauge, a core measure tied to consumer spending issued by the Commerce Department, was up 1.9 percent in June from a year earlier.

Preferred Range

Some policy makers, including Ben S. Bernanke before becoming chairman, have said they would prefer the rate to be in a 1 percent to 2 percent range.

The Fed last week, in announcing it was holding its interest-rate target at 5.25 percent for a ninth time, acknowledged that financial-market turmoil and declines in housing had increased the risks to growth. Still, they maintained that inflation remained the biggest threat.

Increases in commodity costs and rising labor expenses may leave inflation close to the top of that zone even as the economy slows, economists said.

Some companies are still raising prices to recoup earlier cost increases.

Seattle-based Starbucks Corp., the world's largest chain of coffee shops, raised U.S. prices for lattes, Frappuccinos and other drinks by an average of 9 cents a cup in July to blunt higher costs for dairy, energy and coffee.

The CPI is the government's broadest gauge of costs because it includes goods and services. A report yesterday showed wholesale prices excluding food and fuel rose 0.1 percent, less than economists forecast.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: August 15, 2007 16:13 EDT