Sep 17, 2004 4 min read

By Jeannine Aversa Associated Press Writer

WASHINGTON (AP) – Consumer prices barely budged in August, suggesting that inflation isn’t currently a problem for the economy and Federal Reserve policy-makers can stick with a gradual approach to raising interest rates.

The government’s closely watched inflation barometer, the Consumer Price Index, rose by just 0.1 percent in August from the previous month, the Labor Department reported Thursday. Falling prices for clothes, cars and airfares helped to temper rising prices for medical care, education and some food items.

The tiny rise came after consumer prices dipped 0.1 percent in July.

Excluding energy and food prices, which can swing widely from month to month, “core” prices also inched up by 0.1 percent in August for the third month in a row. That suggested that most other prices are remaining well behaved, analysts said.

From an economic point of view, the inflation picture was slightly better than some analysts were expecting. They were forecasting a 0.2 percent rise in both the overall CPI and for core prices.

A slowing in economic growth in the second quarter, analysts said, made it harder for some companies to raise prices and induced others to cut them, thus improving the inflation climate.

As “the economy perks up, pricing power may reappear, but, for now, the outlook in the near term is benign,” said Steve Stanley, chief economist at RBS Greenwich Capital.

Analysts said the CPI report bodes well for the Fed maintaining a measured approach to raising short-term interest rates.

The Fed is widely expected next week to boost a key rate to 1.75 percent, from 1.50 percent, which would be its third rate increase this year. Analysts say rates are still low by historical standards and need to go up to help prevent inflation from becoming a problem in the future.

The latest picture of prices comes less than two months before Election Day. President Bush has a markedly more positive view than his Democratic rival John Kerry of how the economy and the nation’s job market are doing.

Federal Reserve Chairman Alan Greenspan says the economy hit a bit of a rough patch in the late spring and summer, but now appears to be gaining ground.

In other economic reports:

_ New claims for unemployment benefits rose last week by a seasonally adjusted 16,000 to 333,000, the Labor Department said. The pace of layoffs, however, has slowed over the last year. A year ago, new filings were at 401,000.

_ U.S. households saw their net worth in the second quarter of this year rise to a record $45.91 trillion, reflecting in part higher home and other real-estate values. The second quarter’s figure surpassed the previous all-time high registered in the first quarter of this year.

On the inflation front, Greenspan has struck an optimistic tone. “Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months,” Greenspan said last week.

Crude prices climbed to record highs earlier this summer, topping $48 a barrel, but have moderated in recent weeks.

In August, energy prices dipped 0.3 percent, after a 1.9 percent decline in July. For both months, declining gasoline prices eclipsed higher costs for other energy products.

Food prices edged up 0.1 percent in August, down from a 0.3 percent advance.

Clothing prices in August declined 0.2 percent. New automobile prices dropped 0.3 percent and airfares fell 3.7 percent, the largest decrease since June 1999. Medical care costs rose 0.2 percent and education costs went up 0.6 percent.

So far this year, consumer prices are rising at a seasonally adjusted rate of 3.7 percent, compared with an increase of 1.9 percent for all of last year. The pickup largely reflects higher energy prices.

“Although the present oil shock may not be as significant as the shocks we remember from the 1970s and 1980s, it will definitely register,” said Fed member Edward Gramlich in a speech Thursday. He said Fed policy-makers must always stand guard against inflation. “The worst possible outcome is for monetary policy-makers to let inflation come loose from its moorings,” he said.

AP-ES-09-16-04 1356EDT