NEW YORK (

TheStreet

) -- The latest reads on inflation levels suggest that the Fed will likely sit tight.

The Department of Labor reported that June's consumer price index slipped 0.2%, after a 0.2% rise in May. The report is line with economists' estimates.

"Considering that QE2 was intended to alleviate deflationary pressures, the Fed must be thinking that its mission is accomplished," said Ward McCarthy, chief financial economist with Jefferies & Co.

The decline in overall prices was largely due to a drop in gas costs, which offset rising costs in food, health care, autos and clothing. Americans are expected to take comfort in the fact that the food index only climbed by 0.2%, the smallest rise this year.

While overall inflation saw an improvement, core inflation rose by 0.3%. That means Americans are still feeling some inflationary pressures outside of food and energy costs, especially given that May saw a similar uptick in the core reading.

The 0.3% climb in the core indicates there has been some "pass through" of higher energy costs to broader prices, explained Stuart Hoffman, chief economist with PNC Financial Services Group. But, Hoffman noted that one "certainly does not think deflation" with this gain and so the Fed's view will likely be to "hold steady." In short, "this doesn't really affect Fed policy," said Hoffman.

Economists are expected to keep a close watch on inflation as the slight improvement in overall consumer prices still does not reverse the 3.6% increase in the index seen over the last year.

Meanwhile, the

Federal Reserve Bank of New York

reported this morning that manufacturing activity in the New York region eased slightly to negative 3.76 in July. That follows a surprising plunge to negative 7.8 in June.

The consensus estimate was for the index to stay unchanged, while economists polled by Briefing.com projected a one point improvement.

The New York manufacturing activity index plunged from an April reading of 22, spurring fears that the economic recovery was faltering. Those concerns increased after Philadelphia also reported a falloff in its regional manufacturing activity for June. A pickup in the auto industry helped boost the latest reading on overall manufacturing activity in the U.S. for June, raising hopes that regional activity on the east coast would begin to pick up too.

-- Written by Chao Deng in New York.

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