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Recent years have witnessed the wide adoption of the RFID technology in many important application domains including logistics, inventory, retailing, public transportation, and security. Though RFID tags (transponders) can be passive, the high power consumption of RFID readers (interrogators) has become a critical issue as handheld and mobile readers are increasingly available in pervasive computing environments. Moreover, high transmission power aggravates interference, complicating the deployment and operation of RFID systems. In this paper, we present an energy-efficient RFID inventory algorithm called Automatic Power Stepping (APS). The design of APS is based on extensive empirical study on passive tags, and takes into consideration several important details such as tag response states and variable slot lengths. APS dynamically estimates the number of tags to be read, incrementally adjusts the transmission power level to use sufficient but not excessive power for communication, and consequently reduces both the energy consumption for reading a set of tags and the possibility of collisions. We design APS to be compatible with the current Class-1 Generation-2 RFID standards so that a reader running APS can interact with existing commercial tags without modification. We have implemented APS both on an NI RFID testing platform and in a high-fidelity simulator. The evaluation shows that APS can save more than 60% energy used by RFID readers while maintaining comparable performance on the read rate.