Washington: U.S. consumer prices unexpectedly fell in August as gasoline prices resumed their decline and a strong dollar curbed the cost of other goods, pointing to tame inflation that complicates the Federal Reserve`s decision whether to hike interest rates.

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The Labor Department said on Wednesday its Consumer Price Index slipped 0.1 percent, the first drop since January, after edging up 0.1 percent in July. In the 12 months through August, the CPI rose 0.2 percent after a similar gain in July.

Signs of a disinflationary trend reasserting itself are in stark contrast with a fairly healthy economy and a rapidly tightening labor market, and highlight the dilemma Fed officials face as they contemplate raising interest rates for the first time in nearly a decade.

The U.S. central bank`s policy-setting committee was due to start a two-day meeting later on Wednesday. While solid data on consumer spending, housing and employment have been supportive of a rate hike, the case for higher borrowing costs has been undermined by recent global financial markets turmoil.

"You can make a strong case either way for the Fed to begin raising interest rates or waiting," said Ryan Sweet, a senior economist at Moody`s Analytics in West Chester, Pennsylvania.

"The prudent risk management approach would argue for them to hold off, but if the Fed was really data dependent there is a very a strong case to raise rates on Thursday."

U.S. financial markets were pricing a 29 percent probability of a lift-off in the Fed`s benchmark overnight interest rate on Thursday, little changed from before the data`s release.

A Reuters survey of 80 economists showed 45 expected the U.S. central bank to keep its short-term interest rate near zero.

Stocks on Wall Street were trading higher in the wake of the soft CPI data. Prices for U.S. Treasuries rose marginally, while the dollar fell against a basket of currencies.

Tightening labor market conditions, marked by record high job openings and a 5.1 percent unemployment rate, have so far not spurred faster wage growth.

Sluggish wage gains and a strong dollar have contributed to keeping inflation below the Fed`s 2 percent target. Economists had forecast the CPI unchanged in August and rising 0.2 percent from a year ago.


DOLLAR DAMPENING INFLATION

The so-called core CPI, which strips out food and energy

costs, ticked up 0.1 percent last month after a similar rise in July. The muted gains in the core CPI reflect the dollar`s impact on the cost of imported goods.

The dollar has gained 17.1 percent against the currencies of the United States` main trading partners since June 2014.

In the 12 months through August, the core CPI increased 1.8

percent. It was the fifth time in six months that the 12-month

change was 1.8 percent. The Fed tracks the personal consumption expenditures price index, excluding food and energy, which is running well below the core CPI.

"One thorn in the Fed`s side is inflation. I don`t think today`s CPI number really advances the debate on whether we are any closer to getting to that 2 percent target that the Fed is clearly focused on," said Mike Moran, head of economic research for the Americas at Standard Chartered Bank in New York.

Last month, gasoline prices fell 4.1 percent, the biggest drop since January, after rising 0.9 percent in July. Gasoline prices had risen for three straight months. Food prices gained 0.2 percent as the cost of eggs increased 7.7 percent.

Egg prices are now up 35.3 percent from a year ago, following the avian flu that struck some parts of the country early in the year. There were increases in prices for tobacco and apparel. However, airline fares fell 3.1 percent and used car prices declined for a fourth straight month.

The rental index increased 0.3 percent last month, matching July`s gain. Demand for rental accommodation is being driven by rising household formation as the sturdy labor market encourages young adults to leave their parental homes.

The hot rental market is helping to fuel home building activity, with a separate report on Wednesday showing homebuilder confidence near a decade high in September.