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Consumer prices rise by 0.4 percent in July

WASHINGTON - A new surge in energy prices pushed inflation higher in July, but other prices were more restrained, raising hopes on Wall Street that interest rates won't be rising further.

The Consumer Price Index jumped 0.4 percent last month, double the June increase, the Labor Department reported Wednesday. But outside of energy and food, prices rose by just 0.2 percent, the smallest gain in five months.

That represented a second dose of good inflation news, following a report Tuesday that wholesale prices were up just 0.1 percent in July and, excluding food and energy, actually fell by 0.3 percent.

The Dow Jones industrial average rose 96.86 points to close at 11,327.12, its best close in three months. The Dow has gone up nearly 229 points in two days.

Two other reports Wednesday added to the view that a slowing economy could help to hold inflation in check.

The Federal Reserve reported that industrial production rose by 0.4 percent in July, just half the June gain, as manufacturing output slowed dramatically, reflecting the continued woes of U.S. automakers.

And the Commerce Department said new home construction dropped by 2.5 percent in July. It was the fifth decline in the past six months and pushed construction to a seasonally adjusted annual rate of 1.795 million units, the slowest pace since November 2004.

Building permits, considered a good barometer of future activity, dropped by a sizable 6.5 percent, a further sign that the five-year housing boom is now over.

Wall Street saw the combination of lower core inflation and a slowing economy as a sign that the Federal Reserve will not raise rates for an 18th time when the Fed meets again on Sept. 20.

But private economists said investors may be overreacting. Some predicted the Fed would raise rates at least once more this year in response to core inflation that has risen by 2.7 percent over the past 12 months, higher than the Fed's 1 percent to 2 percent comfort zone.

''The economy, while cooling off, is not cooling off quickly enough to lower inflation pressures and satisfy the Fed,'' said David Wyss, chief economist at Standard & Poor's in New York.