Inflation remains in check in U.S.

Wholesale inflation posted a better-than-expected reading as both food and energy costs retreated in June. Industrial production rebounded as well, but home builders’ confidence fell to the lowest level in 16 years as the housing slump persisted.

Reports released Tuesday painted a picture of an economy that was emerging from last winter’s slowdown despite the continued weakness in housing. And in what will be welcome news at the Federal Reserve, the recent acceleration in inflation caused by a surge in energy and food costs appears to be abating.

The Labor Department’s producer price index fell by 0.2% last month following a 0.9% surge in May.

It was the first decline since January and a much better showing than the small rise that had been expected. Gasoline prices fell for the first time since January and food costs dipped for a second month in a row.

Meanwhile, the Federal Reserve reported that industrial output rose by a solid 0.5% in June, led by strong growth in manufacturing, which is bouncing back following a period of weakness when the year began as businesses struggled to work down a backlog of unsold goods.

However, housing, the economy’s major weak spot, continued to be a problem in early July as a confidence survey by the National Assn. of Home Builders dropped to a reading of just 24, the lowest level since January 1991, during the last major housing correction. The index had been at 28 in June.

Investors believe the economy’s current performance will mean that the Federal Reserve, which has kept interest rates unchanged for the last year, will remain on the sidelines for the rest of this year and into 2008, giving borrowers a break.

Fed Chairman Ben S. Bernanke is set to deliver the central bank’s midyear economic forecast to Congress today. Analysts predicted he would repeat the Fed’s concern that inflation is still a bigger risk than a possible recession.

Core inflation at the wholesale level, which excludes volatile food and energy, rose by a higher-than-expected 0.3% in June, but analysts discounted this increase as being heavily influenced by a jump in new car prices.

Without those gains, core inflation would have been up a much more modest 0.1%.