Underlying U.S. inflation slows to 37-year low
The main Consumer Price Index rose 0.3 percent in August, below economists' forecasts of a 0.4 percent gain despite a surge in energy costs, the Bureau of Labor Statistics said.
The core CPI, which strips out the impact of volatile food and energy prices, rose just 0.1 percent on the month. On a year-over-year basis, the core CPI, which is viewed as a better gauge of inflation trends, slowed to a 1.3 percent rate in August from 1.5 percent in July.
The data suggested the economy is not yet safe from the dangers of deflation even as it enjoys a burst of growth. For that reason, the Fed repeated at a policy meeting Tuesday that it would keep its federal funds rate at a 45-year low of 1 percent for a "considerable" amount of time.
For the past year, the annual rate of core inflation has been cut almost in half, dropping from 2.4 percent to its current low, not hit since 1966. Some Fed officials, like Governor Ben Bernanke, have said the large amount of slack in the economy means that pace will ease further next year.
To prevent the inflation slowdown from turning into a persistent decline in prices, or deflation, Fed officials have vowed to keep interest rates low or cut them more, if needed.
"For the United States, the disinflationary trend continues. This portrays an economy operating with a lot of slack, that is, unused capacity. As a result, the Fed will continue to be concerned with the risk of deflation," said Sal Guatieri, senior economist at BMO Financial Group in Toronto.
"Therefore it will continue to hold interest rates low despite expected strong growth in the quarters ahead," he said.
The unemployment rate stands near a nine-year high of 6.1 percent and the economy shed 93,000 jobs last month. The industrial sector is using only 74.6 percent of its capacity, a 20-year low, and most economists believe that until economic growth expands briskly for several quarters to soak up that slack, inflation will keep declining.
Part of the reason is that productivity remains so strong, meaning companies can efficiently make more goods and offer services without hiring, and even continue to get rid of workers. Economists fear that ongoing lay-offs could cut short the current rebound.
"You could still have growth for a while without any job growth," said Anthony Karydakis, senior financial economist at Banc One Capital Markets in Chicago. "If you don't have any employment growth, you're not going to have enough income growth to sustain the recovery down the road."
The CPI data showed energy costs jumping 2.7 percent last month, the biggest increase since March and the primary factor behind the overall increase in consumer prices. Gasoline prices surged 6.2 percent, the biggest gain since February.
The figures also revealed a hefty 0.5 percent increase in new car prices, the biggest gain in five years, even as zero-percent financing and big rebates remained in place. Used car prices plunged.
The rise in energy costs kept overall goods prices from falling, but goods prices excluding food and energy dipped a bit. Over the last 12 months, so-called core goods prices have fallen 2.5 percent, the biggest drop on record dating to 1958. The cost of services has been rising at a much faster pace, but price increases have slowed in recent months.
While inflation continues to ease, growth has already sped up smartly. Tax cuts have spurred retail sales, and despite the rise in mortgage rates, home builders remain upbeat. Gross domestic product, the broadest measure of economic activity, is seen expanding by 5 percent or more this quarter, up from 3.1 percent in the prior quarter.
According to the Redbook report from Instinet Research, sales were up at a 3.4 percent annual pace in the Sept. 13 week, compared with a 3.6 percent rate the prior week.