Consumer Prices in U.S. Increased 0.4% in August; Core Up 0.1%

By Timothy R. Homan

Sept. 16 (Bloomberg) -- The cost of living in the U.S. climbed 0.4 percent in August, underscoring the Federal Reserve’s view that inflation will be contained.

The gain in the consumer price index was larger than forecast and followed no change in July, the Labor Department said today in Washington. Excluding food and energy costs, the so-called core index increased 0.1 percent, matching expectations.

Companies such as Kroger Co. are having to keep a lid on prices to revive demand as the economy starts to emerge from the worst recession since the 1930s. A lack of inflation will probably give Fed policy makers leeway to hold interest rates near zero in the foreseeable future to secure a recovery.

“Underlying inflation remains dormant,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “This gives the Fed plenty of room to keep rates low for an extended period.”

Economists forecast consumer prices would rise 0.3 percent, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from a decline of 0.1 percent to a gain of 0.6 percent.

Compared with a year earlier, prices were down 1.5 percent.

For the core index, prices were up 1.4 percent from a year earlier, the smallest gain since February 2004.

The increase in the cost of living reflected a 4.6 percent increase in energy prices in August. Gasoline climbed 9.1 percent.

Gasoline

Gasoline prices this month are in line with August figures, according to AAA. Regular pump prices averaged $2.58 a gallon in the first 15 days of September, compared with an average of $2.62 in August.

Food prices, which account for about a seventh of the CPI, increased 0.1 percent in August, the smallest gain since January.

Lower food prices are dragging down revenue at some businesses. Kroger, the largest U.S. supermarket chain, yesterday reported second-quarter profit that fell more than analysts’ estimates as prices for some products, particularly produce and dairy, decreased more than expected.

“Most of us have never seen a selling environment like now,” Chief Executive Officer David Dillon said on a conference call, adding that prices will continue to decline over the next several quarters. “It will be like this a while longer.”

The increase in the core index reflected gains in used cars, air fares and hotel rates.

Rents Stable

Rents, which make up almost 40 percent of the core CPI, were little changed. Owners-equivalent rent, one of the categories used to track rental prices, climbed 0.1 percent following no change in July.

New vehicle prices plunged 1.3 percent, the biggest drop since 1972. The Labor Department said it considered the administration’s “cash-for-clunkers” initiative as a discount off purchase prices, contributing to the drop. The program gave buyers as much as $4,500 for trading in older models for new, more fuel-efficient autos.

Sales at automobile dealerships and parts stores climbed 11 percent in August, the most since October 2001, according to a Commerce Department report yesterday.

Excluding autos, the core rate would have climbed 0.2 percent, according to a Labor Department spokesman.

The CPI is the broadest of the three monthly price gauges from Labor because it includes goods and services. Labor said last week that prices of goods imported into the U.S. rose 2 percent in August on higher petroleum costs.

Fed View

Fed policy makers on Aug. 12 committed to keeping the key interest rate between zero and 0.25 percentage point “for an extended period” to promote economic recovery. They said they expected “inflation will remain subdued for some time.” The central bankers meet again next week.

Former Fed Chairman Alan Greenspan, speaking yesterday to an investor conference sponsored by Deutsche Bank Securities Inc., said inflation will continue to cool until next year.

“We’ve got worldwide disinflation in train and it will continue for a short while,” he said. “Our model says that by the early months of next year the rate of inflation will fall below 1 percent on an annual rate” before starting to climb.

A report from the Labor Department yesterday showed prices paid to factories, farmers and other producers rose 1.7 percent in August, more than twice as much as forecast, led by gasoline costs.

Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net