Consumer prices dropped in July for the first time in eight months as a sharp run up in energy costs reversed, the government said on Tuesday in a report showing underlying inflation pressures largely in check.

The consumer price index (search), the most widely used gauge of inflation, slid 0.1 percent in July, the Labor Department (search) said. It was the first decline in consumer prices since a 0.2 percent drop in November.

The so-called core CPI, which strips out volatile food and energy costs, inched up just 0.1 percent as a big jump in lodging costs largely offset drops in the price of apparel, recreation and education and communication.

Wall Street economists had expected the CPI to rise 0.1 percent with the core rate up 0.2 percent. The tamer-than-expected readings were likely to be warmly received on Wall Street since they implied the Federal Reserve (search) need not be in a rush to push interest rates up to head off inflation.

Energy costs plunged 1.9 percent in July after gains of 2.6 percent in June and 4.6 percent in May. The July drop in energy prices more than offset a 0.3 percent gain in the price of food.

The most troublesome cloud on the inflation horizon has been oil prices and the energy price relief U.S. consumers felt in July could be short lived.

U.S. crude prices closed at a record high $46.58 on Friday, but have eased slightly this week. Benchmark light crude was trading around $45.76 a barrel early on Tuesday.

"The economy has got a lot of basic thrust to it but these current energy prices have created some headwinds for us," U.S. Treasury Secretary John Snow said on Friday.

Last week, when Fed officials raised interest rates a quarter-percentage point to 1.5 percent, they said the run-up in energy prices was likely a big factor behind the slower pace of U.S. economic growth in recent months.

Still, they said the expansion appeared poised to gain steam and offered no sign of willingness to abandon a "measured" campaign of rate rises.

Indeed, officials could embark on a more aggressive series of rate rises if oil price gains fuel worker wage demands or if businesses try to jack up prices to cover their fuel bills. But the report on consumer prices suggested that is not an immediate concern.

The easing of inflation in July had the effect of pushing up inflation-adjusted earnings. Real average weekly earnings, which posted a big 0.8 percent drop in June, rose 0.7 percent last month. Still, over the last 12 months, they are down 0.7 percent.