Consumer prices fell by 0.3 percent in July, posting its largest decline in 15 years — led by a sharp drop in gasoline and other energy products.

The consumer price index, the broadest measure of U.S. retail prices, dropped a larger-than-expected 0.3 percent in July, its first decline since April 2000. But the 'core' index — which excludes volatile energy and food prices — rose slightly by 0.2 percent, down from a 0.3 percent gain in June.

The index, which followed a 0.2 percent increase in June, came in as a surprise, as many analysts were predicting consumer prices would edge down by only 0.1 percent.

The 0.3 percent decline reported Thursday was the first drop in consumer prices this year and the best showing on inflation since a 0.4 percent decrease was registered in April 1986.

The July CPI reading leaves the door open for the Federal Reserve to once again lower interest rates when its policy-setting Federal Open Market Committee meets on Tuesday. The central bank has already cut rates six times by a total of 2.75 percentage points this year in an effort to prop up an shaky U.S. economy.

While some members of the FOMC have openly expressed concern the Fed may have moved too aggressively, raising the possibility that inflation could take off when economic growth picks up again, Thursday's report reflected relatively tame price pressures.

Analysts widely expect the Fed to cut rates by a quarter of a percentage point on Tuesday.

In the months ahead, economists believe inflation will remain contained. Soaring energy prices, which caused consumer inflation to jump by 0.6 percent in January, have eased in the face of eroding global demand. And, the yearlong economic slowdown has made it harder for companies to raise their prices and has made many of them reluctant to grant workers big increases in pay and benefits.

So far this year, consumer prices have increased at an annual rate of 2.8 percent, compared with an increase of 3.4 percent for all of 2000.

A 5.6 percent plunge in energy prices — also the largest since April 1986 — accounted for much of the good inflation news for July. That came on top of a 0.9 percent decline in energy prices in June.

Gasoline prices plummeted by 11 percent in July. Nationwide average prices at the pump have tumbled since peaking on May 18 at $1.76 a gallon as refiners rushed to fill shortages that developed during the spring.

Natural gas prices, which posted a record decline in June, fell by 4.1 percent in July. Home-heating oil went down by 2.8 percent.

After soaring by a record 3.8 percent in June, electricity prices eased in July, rising 0.6 percent. That comes as residents of California cope with a power crisis caused by shortage of electrical generating capacity.

The retreat in energy prices spilled over into lower airfares, which fell by 0.2 percent in July.

Meanwhile, food prices edged up 0.3 percent in July, after a 0.4 percent increase. Higher prices for vegetables, dairy products, poultry and pork outweighed lower prices for fruits and beef.

Elsewhere, clothing prices declined by 0.6 percent in July as retailers discounted merchandise to lure shoppers.

The costs for medical care, including doctor visits and prescription drugs, rose by just 0.1 percent in July, the smallest increase since July 1997.

Prices for tobacco shot up by 4.8 percent, the largest increase since September 1999. Companies have been raising prices to cover the costs of legal settlements.

Last week the government reported wholesale prices plunged by 0.9 percent in July, the largest decline in eight years. A sharp drop in the costs of gasoline and other energy products led the way.

In a separate report, the Labor Department also said lines for unemployment benefits were shorter in the week ended Aug. 11. First-time claims for unemployment benefits fell to 380,000 from 388,000 in the previous week. Analysts had expected claims to rise to about 393,000.

The decrease brought the four-week moving average of claims to 370,750, its lowest point since the week ended March 10. Analysts see the four-week average as a less volatile measure of the labor picture and the decrease in the Aug. 11 week points to stronger demand for workers.

And in another report, the Labor Department also said inflation-adjusted worker earnings rose in July. Real average weekly earnings grew by 0.6 percent in the month after a 0.3 increase in June.

Reuters and the Associated Press contributed to this report.