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Consumer inflation slows in June, but improvement may be temporary

WASHINGTON - Consumer inflation slowed in June, helped by a temporary drop in energy prices. But the improvement was expected to be short-lived with a new crisis in the Middle East pushing crude oil prices to record highs last week.

The Labor Department reported that its closely watched Consumer Price Index rose by just 0.2 percent in June, the smallest increase in four months and just half of the 0.4 percent May rise.

The overall increase was

in line with expectations, although core inflation, which excludes energy and food, rose by 0.3 percent in June, higher than the 0.2 percent Wall Street had been expecting. That increase left core inflation rising for the past three months at an annual rate of 3.6 percent, far above the Federal Reserve comfort zone of 2 percent or less.

In a second report, the Commerce Department said that construction of new homes fell by 5.3 percent in June, another signal that the once-booming housing market is beginning to slow.

Builders started construction on new homes at a seasonally adjusted annual rate of 1.85 million units last month. Applications for building permits, considered a good sign for future activity, fell for a fifth straight month.

Federal Reserve Chairman Ben Bernanke, delivering the board's semiannual report on monetary policy Wednesday, talked about the slowing housing market as a signal that the economy is moving to a slower growth, which should help keep inflation under control.

''The anticipated moderation in economic growth now seems to be under way,'' he said in testimony to the Senate Banking Committee.

His comments sent stock prices soaring as investors believed they signaled that the central bank's two-year campaign to raise interest rates to slow growth and keep inflation contained may be drawing to a close.

The Dow Jones industrial average soared by 212.19 points to end the day at 11,011.42.

The 0.2 percent increase in inflation in May reflected a 0.9 percent drop in energy prices, the first decline for energy costs in four months.