Aug. 14 (Bloomberg) -- A measure of U.S. prices at the wholesale level rose less than forecast in July, indicating inflation outside of energy costs remains contained.

Prices paid to U.S. producers, excluding food and energy, rose 0.1 percent in July, the smallest gain in three months, the Labor Department said today in Washington. Producer prices overall increased 0.6 percent on higher costs for gasoline and natural gas, following a 0.2 percent decline in June.

The report may help ease the concerns of Federal Reserve policy makers, who reiterated at their meeting last week that inflation remains the biggest risk to the economy. Competition is restraining businesses from raising prices, even as overseas demand boosts raw materials costs.

``The report suggests inflation is well under control,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The headline number was up but we know wholesale gasoline prices have fallen a lot since this survey.''

Another government report today showed that the U.S. trade deficit unexpectedly narrowed in June as exports soared to a record. The gap shrank 1.7 percent to $58.1 billion from a revised $59.2 billion in May that was smaller than previously estimated, the Commerce Department said in Washington.

After the reports, the yield on the benchmark 10-year U.S. Treasury note was up 3 basis points at 4.79 percent as of 9:47 a.m. in New York. Stocks were mixed in early trading.

Prices paid to factories, farmers and other producers were forecast to rise 0.2 percent, according to the median of 73 forecasts in a Bloomberg News survey. Estimates ranged from an increase of 0.8 percent to a decline of 0.5 percent.

Core Prices

Core prices were projected to rise 0.2 percent in July, with estimates ranging from a 0.1 percent decrease to a 0.4 percent increase. Over the last 12 months, core producer prices rose 2.3 percent, less than the 2.5 percent economists had forecast. That compares with a 1.8 percent gain in the 12 months ended in June.

Producer prices were up 4 percent from July 2006, compared with a 3.3 percent gain in the 12 months ended in June.

Food prices fell 0.1 percent, after falling 0.8 percent in June.

Fuel Prices

Fuel prices rose 2.5 percent in July after declining 1.1 percent the prior month. The price of gasoline rose 3.2 percent, and natural gas costs rose 2.7 percent.

For producer prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. On that basis, crude oil prices rose in July from the prior month, while natural gas futures prices fell.

Costs of intermediate goods, those used in earlier stages of production, rose 0.6 percent in July, after a 0.5 percent gain the prior month. They were up 4.1 percent from a year ago.

Excluding food and energy, intermediate prices rose 0.2 percent after rising 0.4 percent the prior month. Compared with a year ago, core intermediate goods costs rose 2.4 percent.

Prices for raw materials, or so-called crude goods, rose 1.2 percent, following a 0.3 percent increase in June.

Passenger car prices rose 0.2 percent after gaining 1.4 percent the prior month. Costs of light trucks rose 1.1 percent after a 1 percent increase.

The report showed prices for capital equipment rose 0.1 percent last month after a 0.3 percent increase in June. Computer prices fell 3.3 percent.

Producer prices are one of three monthly inflation measures reported by the government. A report last week showed prices of goods imported into the U.S. increased 1.5 percent, the most since March. Import prices excluding petroleum gained 0.2 percent, the fifth straight rise.

CPI Report

Tomorrow, the Labor Department is forecast to report that the consumer price index rose 0.1 percent in July after a 0.2 percent gain the prior month, while core inflation held at 0.2 percent, according to a Bloomberg survey median.

For most of the last three years, the Fed's preferred inflation measure has been at or above the top of its comfort zone of a 1 percent to 2 percent gain cited by several policy makers including Chairman Ben S. Bernanke.

Fed policy makers, who kept the benchmark interest rate at 5.25 percent on Aug. 7, acknowledged that readings on core inflation ``have improved modestly in recent months.'' Still, the ``predominant policy concern remains the risk that inflation will fail to moderate as expected,'' they said in a statement.

Companies usually try to absorb higher materials costs before considering raising prices that could jeopardize their sales, economists said.

For some, that strategy is hurting. Caterpillar Inc., the world's biggest maker of heavy-duty diesel engines and earth- moving equipment, said July 20 its second-quarter profit fell 21 percent, in part because of rising costs of aluminum and nickel.

Some companies doing better include American Airlines parent AMR Corp., which reported a 8.9 percent jump in second- quarter earnings as it raised fares and filled more seats. The airline is trying to sell fewer deeply discounted tickets.

``We continue to remain cautiously optimistic about this year, although rising fuel prices are a real concern in the second half,'' Chief Financial Officer Thomas Horton said on a July 18 conference call with analysts.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: August 14, 2007 09:55 EDT