WASHINGTON - U.S. wholesale prices increased modestly in July from June but food prices rose sharply, led by the biggest increase in corn prices in nearly six years as the country's severe drought continues.

The Labor Department said Tuesday that the producer price index, which measures price changes before they reach the consumer, increased a seasonally adjusted 0.3 per cent last month. That followed a 0.1 per cent gain in June.

Excluding food and gas costs, wholesale prices rose 0.4 per cent.

Food prices rose 0.5 per cent last month, a sign that the drought in the Midwest is driving costs higher. The dry weather has harmed a range of crops, notably corn and soybeans.

Corn prices jumped 34.5 per cent in July, the largest gain since Oct. 2006. Corn is used to make everything from cosmetics to cereal, soda, cake mixes and candy bars. It is also used as a feed for cattle and hogs. Pork, beef and veal prices also increased sharply in July.

The U.S. Agriculture Department said Friday that the U.S. corn harvest will fall to its lowest level in five years this year because of the drought.

Still, overall inflation remains mild.

Wholesale prices increased only 0.5 per cent in the 12 months that ended in July. That's the lowest since October 2009. Excluding food and energy costs, prices increased 2.5 per cent in the 12 months that ended in July, the smallest year-over-year gain since June 2011.

Low inflation means consumers have more money to spend, which helps the economy. It also gives the Federal Reserve more space to keep interest rates low in an effort to spur economic growth. If prices began to rise rapidly, the Fed might be forced to raise rates in response.

Wholesale energy prices fell 0.4 per cent in July, the first straight monthly decline. Oil and gas costs have increased recently and will probably affect August's data.

Gas prices are also starting to move back up. The nationwide price for a gallon (3.7 litres) of gas averaged $3.67 on Friday, up 11 cents in just the past week and almost 30 cents higher than a month ago.

News from © The Associated Press, 2012