By Lucia Mutikani
WASHINGTON (Reuters) - Consumer prices were flat in June as the cost of gasoline dropped, offering some relief for cash-strapped Americans and scope for the Federal Reserve to ease monetary policy further to help the faltering recovery.
Other reports on Tuesday showed confidence among homebuilders spiked to a five-year high in July and industrial production rebounded last month. Despite that, the economic growth trend remains tilted to the weak side, analysts said.
"There is a growing case for a helping hand from the Fed for the economy and the recovery. Monetary policy is the only game in town," said Millan Mulraine, senior macro strategist at TD Securities in New York.
Federal Reserve Chairman Ben Bernanke offered few new clues on Tuesday whether the U.S. central bank was moving closer to a fresh round of monetary stimulus. He told policymakers the Fed would act if necessary, to support the economy.
The economy has been slammed by fears of steep government spending cuts and higher taxes next year, and troubles from the debt crisis in Europe. That has caused a slowdown in job growth and declines in retail sales over the past three months.
June's CPI reading was in line with economists' expectations and followed a 0.3 percent drop in May. Stripping out food and energy, inflation pressures were also benign. Core CPI rose 0.2 percent for a fourth straight month.
Overall consumer prices rose 1.7 percent year on year in June after increasing by the same margin in May.
Minutes of the Fed's June meeting released last week showed it was open to buying more Treasury bonds to spur the economy, but the recovery would probably need to weaken further for broad consensus among policymakers.
The economy grew at a 1.9 percent annual rate in the first quarter and estimates for the April-June period are converging around a 1.5 percent pace.
A second report showed the NAHB/Wells Fargo Housing Market index - which measures sentiment among homebuilders - jumped to 35 in July, the highest since September 2002, from 29 in June.
In a reversal of fortunes, housing has been one of the few bright spots in the economy, with the home price decline having bottomed in recent months. Still residential construction is only a fraction of gross domestic product and cannot shoulder the economic recovery alone.
"The recovery in the housing market is persisting despite recent signs of slowing growth in other sectors of the economy," said Daniel Silver, an economist at JPMorgan in New York.
A third report from the Fed showed industrial production grew 0.4 percent in June, boosted by output at factories, especially automakers, after slumping 0.2 percent in May.
However, growth in manufacturing slowed sharply in the second quarter, expanding at an annual rate of 1.4 percent during the second quarter, compared with a 9.8 percent pace in the previous three months.
With both domestic and global demand weak, factories will likely struggle to boost output.
RELIEF AT THE PUMP
U.S. financial markets were little moved, with investors focused on Bernanke's testimony. Stocks fell on Wall St. after Bernanke gave few clues on how and when the Fed might offer further stimulus. Treasury debt prices were little changed. The dollar rose against a basket of currencies as Bernanke said the central bank was prepared to boost a slowing economy.
Last month, overall inflation was held back by a 2.0 percent drop in gasoline prices, offsetting a 0.2 percent rise in food prices. Gasoline prices at the pump have declined about 53 cents from their peak around $4 a gallon in April, easing some of the strain on household budgets.
However, food prices could accelerate in the months ahead as half of the country experiences drought. Still, economists said that was unlikely to prevent further monetary policy easing from the Fed.
"The drought has boosted prices for corn, soybeans and wheat, which should eventually pass through into the CPI, albeit with a lag," said Michael Hanson, a senior economist at Bank of America Merrill Lynch in new York.
"We think Fed officials are likely to look through that as temporary."
Subdued inflation and increased working hours last month put more money into Americans' pockets.
Average weekly earnings, adjusted for inflation, rose 0.5 percent last month after gaining 0.2 percent in May, the Labor Department said. Compared with June last year, weekly earnings were up 0.6 percent.
Core consumer prices were last month lifted by apparel prices, which rose for a fourth consecutive month.
New motor vehicle prices gained for the fifth month in row, while prices for used cars and trucks were flat after three straight months of strong gains.
The cost of medical care rose at its fastest pace since September 2010, reflecting big increases for hospital and doctors' services. There were also gains in the cost of tobacco and recreation.
Housing costs were muted, with a measure of the amount homeowners would pay to rent or would earn from renting their property advancing 0.1 percent in June after gaining by the same margin in May.
In the 12 months to June, core CPI increased 2.2 percent after rising 2.3 percent in May.
(Additional reporting by Jason Lange; Editing by James Dalgleish and Andrew Hay)