U.S. consumer prices rose slightly in July as higher food costs were partly offset by falling prices for a range of other goods, suggesting benign inflation that could persuade a cautious Federal Reserve to delay raising interest rates until December.

But with the labour market near full employment and economic growth accelerating, analysts expect the U.S. central bank will announce a plan to start unwinding its massive bond portfolio at its policy meeting next month.

"We believe the Fed will focus on the balance sheet in September, foregoing another rate hike until December," said James Bohnaker, an economist at IHS Markit in Lexington, Mass. "The inflation outlook will not change drastically anytime soon."

The Labour Department said on Friday its Consumer Price Index edged up 0.1 per cent last month after being unchanged in June. That lifted the year-on-year increase in the CPI to 1.7 per cent from 1.6 per cent in June.

Economists had forecast the CPI rising 0.2 per cent in July and climbing 1.8 per cent year-on-year.

'Special factors'

Stripping out the volatile food and energy components, consumer prices gained 0.1 per cent for the fourth straight month. The so-called core CPI rose 1.7 per cent in the 12 months through July and has now increased by that margin for three consecutive months.

Despite the modest gain in consumer prices, which came on the heels of a drop in producer prices in July, many economists continue to share the Fed's conviction that transitory factors were holding back inflation.

Federal Reserve chair Janet Yellen told lawmakers last month that "some special factors," including prices for mobile phone plans and prescription drugs, were partly responsible for the low inflation readings. Mobile phone prices continued to decline in July, falling 0.3 per cent.

Prices of U.S. government debt initially rose on the inflation data, but pared gains after Russian Foreign Minster Sergei Lavrov said there was a Russian-Chinese plan to defuse tensions between the United States and North Korea.

The dollar was trading lower against a basket of currencies, while U.S. stocks rose.

Fed's conundrum

The Fed has a 2 per cent inflation target and tracks a measure that has been stuck at 1.5 per cent since May.

Inflation remains tame despite a tightening labour market, a conundrum for the central bank as it contemplates tightening monetary policy further.

The Fed is expected to outline a program to start offloading its $4.2 trillion US portfolio of Treasury bonds and mortgage-backed securities at its Sept. 19-20 policy meeting.

It is expected to raise interest rates in December, though such a move would depend on future inflation data. The Fed has raised borrowing costs twice this year.