Consumer Prices Barely Budge -- Except for Rents and Medical Costs

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By Lucia Mutikani

WASHINGTON -- U.S. consumer prices barely rose in August, but gains in rents and medical care costs pointed to a stabilization in underlying inflation that could allow the Federal Reserve to start trimming its bond purchases.

The Labor Department said on Tuesday its Consumer Price Index edged up 0.1 percent last month after rising 0.2 percent in July. In the 12 months through August, the increase in the CPI slowed to 1.5 percent after advancing 2.0 percent in July. Economists had expected consumer prices to rise 0.2 percent last month and increase 1.6 percent from a year-ago.

Stripping out the volatile energy and food components, the so-called core CPI rose 0.1 percent after increasing by 0.2 percent in each of the past three months. Rents and medical care accounted for most of the increase in the core CPI. That took the increase over the past 12 months to 1.8 percent, the largest rise since March. The core CPI had gained 1.7 percent in July.

The steady rise in the year-on-year core CPI could ease concerns among some Fed officials about a disinflationary trend becoming entrenched.

"We have seen the trough for the core rate during the summer. We expect we will see the core drift higher later this year," said Peter Newland, economist with Barclays Capital in New York. "The core inflation should move closer to their [the Fed's] target over the next several months."

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Earlier in the year core inflation was moving lower, and reached levels that made some Fed officials uncomfortable. It has been creeping up for last two months from a two-year low of 1.6 percent touched in June. The dollar pared gains against the yen on the inflation data, while U.S. Treasury debt prices rose marginally.

The inflation data was released as Fed policymakers prepared to meet on Tuesday and Wednesday to deliberate on monetary policy. Economists generally expect the U.S. central bank to announce a scaling back of the $85 billion in bonds it has been buying a month to hold interest rates down at the end of the two-day meeting. The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI.

Fed Chairman Ben Bernanke has viewed the low inflation as temporary and expects prices to push higher as the economy strengthens. Last month, overall inflation was held back by a 0.3 percent drop in energy as the cost of natural gas fell. Energy prices had increased 0.2 percent in July. Food prices nudged up 0.1 percent, rising by the same margin for a second straight month.

Away from food and energy, there were pockets of price pressures, with housing and medical care costs advancing. Rent of shelter, which accounts for about a third of the core CPI, rose 0.3 percent. Owners' equivalent rent of primary residence posted its largest gain since November 2008.

Medical care costs rose 0.6 percent, with prescription drugs posting their largest increase since July 2007. Medical care, which makes up about 10 percent of the core, has been one of the key contributors to the low inflation early in the year.

Consumer Prices Barely Budge -- Except for Rents and Medical Costs
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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