U.S. consumer prices fell 0.2 percent in June, the first monthly fall in a year, with the annual inflation rate unchanged at 3.6 percent, still the highest the Labor Department said.

Excluding food and energy, core inflation rose 0.3 percent, the annual core edging up to 1.6 pct, its highest level since January 2010.

A gauge of manufacturing in New York State showed the sector unexpectedly contracted for the second month in a row as new orders worsened in July, the New York Federal Reserve said.

The pace of decline did moderate somewhat in July from the month before, with the New York Fed's Empire State general business conditions index rising to minus 3.76 from minus 7.79 in June. However, it was still weaker than expected, since economists polled by Reuters had expected a reading of 4.50.

In June the regional index had tumbled sharply, contracting for the first time since November 2010, but the larger national report for the month showed a modest uptick in the pace of growth.

ANALYSTS COMMENTS:

DAVID ADER, HEAD OF GOVERNMENT BOND STRATEGY, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT:

What a dilemma, slow growth and higher core inflation. Actually not a dilemma as Fed sees inflation as transitory and could skirt the issue with drop from energy's contribution, and does have its soft patch support with the weak Empire State report to start off this month.

ALEXANDER HODER, ECONOMIC ANALIST, FTN FINANCIAL, NEW YORK:

The core inflation came in as expected. It is still going up a bit, it lags a bit, it takes time for food and energy components to filter through to the core, so we saw the headline price index come down this month due to gas prices which are measured on a monthly average basis. So even though they started to go down in May, June was the first month where the average was lower than the month before. So you started to see food and energy prices pull the number down. We do expect it to slowly rise in the months to come as food and energy prices dissipate.

On NY Empire State manufacturing: We often look at the new orders component for a forward looking indicator-it's business coming down the pipeline. In July, it was down more than in June which is sort of an ominous indicator. The employment component -- the lowest in at least six months -- supports the argument that the negative headline is a sign of broader based weakness.

ERIC GREEN, CHIEF ECONOMIST AND HEAD OF INTEREST RATE STRATEGY, TD SECURITIES, NEW YORK:

I thought that you would have seen more of a pullback in vehicle prices and we really didn't see that. Also apparel is up. The world is no longer deflationary, and you're seeing that in spades in core commodities.

We are getting a very, very sharp rebound in core inflation and much more than the Fed had bargained for. We will be at price stability and possibly through it before the end of this year.

If you look at a report like this, it argues for a Fed to be much more aggressive than the market is currently pricing in for, which is 2013.

Without stronger growth the response function of the Fed to inflation moving toward price stability will be more like Bank of England and less like the ECB, because they do not believe the rise will be sustained.

PAUL BALLEW, CHIEF ECONOMIST, NATIONWIDE INSURANCE, COLUMBUS, OHIO:

On CPI: We were expecting flat numbers, back to inflationary pressures. It's concentrated in a couple of areas. It doesn't surprise any of us that were looking at it. You look at the top-line numbers and overall inflation was up 3.5 percent over the last year. You're going to get a little noise, but it really reflects pockets of price increases. Certainly food and energy have been the primary drivers with regard to high inflationary pressures. Right now if you look at top-line number, it's being impacted by energy and food. We just had such a strange cycle playing out, with weak demand in the second quarter. It's clearly been a very choppy recovery. On the inflation side, we've had a very uneven pattern playing out; we're living in a very interesting environment with pockets of strength and pockets of weakness. It's been the most abnormal recovery in the post-war area; a very unique recovery.

VIMOMBI NSHOM, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS:

As expected, consumer prices fell in June, as the CPI fell by 0.2 percent, while core prices rose by 0.3 percent for the second month (with May's gain having been the largest in nearly three years). Still, the majority of core's acceleration has occurred within the past six months, pushing this index's annual growth to 1.6 percent -- reaching its highest level since January 2010. Prior to June's decline, the headline CPI had been on a decelerated growth pattern which commenced in February from waning support from energy. However, price levels are still 3.6 percent higher than they were June 2010.

DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS:

July's Empire State manufacturing index at -3.76 is improved from June's -7.79, but still negative and well below the market consensus of a positive 4.50. The market was looking for the Empire State index to rebound from the negative June given improvements in manufacturing surveys that were surveyed later in June, notably the ISM manufacturing index and a particularly impressive Chicago PMI. The continued weakness of the Empire State index raises some doubts over to what extent the manufacturing sector is recovering from the recent soft spot. It may be that only in auto-sensitive areas, which include Chicago, that the fading of supply disruptions coming from Japan will bring a strong rebound in activity. While, the Empire State survey is not a conclusive signal, next Thursday's Philly Fed report will now be awaited with some apprehension.

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