Consumer prices rise slightly as gasoline jumps

Consumer prices rose 0.4 percent in August, the U.S. Labor Department announced Tuesday, as a 9.1 percent surge in gasoline prices skewed the index higher. The report provided a few morsels for the inflation hawks, but not much more.

However, the core rate -- which excludes the often-volatile food and energy component -- rose just 0.1 percent, highlighting the impact of the gasoline price jump and the overall slack demand in the economy.

Economists surveyed by Bloomberg News had expected consumer prices to increase 0.4 percent in August, and the core rate to rise 0.1 percent. Consumer prices were unchanged in July, increased 0.7 percent in June and rose 0.1 percent in May.

What's more, the U.S. economy over the past year still shows little sign of inflation: consumer prices have actually declined 1.5 percent in the past 12 months. The core rate is up just 1.4 percent in the past year, or well within the U.S. Federal Reserve's "comfort zone."

Energy prices surged in August

In August, energy prices surged 4.6 percent, medical care costs increased 0.5 percent, and shelter prices rose 0.1 percent; new car prices fell 1.3 percent and apparel dipped 0.1 percent.

As noted, the August price report is expected to keep the inflation hawks pretty quiet. Most economists do not expect inflation to rise in the months ahead. They say the recession that has idled factory production and resulted in more than 6.7 million lay-offs has led to excess capacity in the commercial sector and slack in the labor force that will limit price and wage increases.

Also working against inflation: the reluctance by those foreign manufacturers who export goods to the United States to raise prices amid intense competition: many refuse to raise prices despite cost increases, for fear of being priced out the lucrative, large U.S. market.

Further, while some chatter has risen in Wall Street and Washington circles about whether to take back part of the $785 billion fiscal stimulus, it's unlikely Congress will act to do that, so long as job creation is not occurring and inflation remains low.

Economic Analysis: Inflation remains tame, as indicated by both the core rate and the 12-month CPI. Further, the 12-month CPI decline will be monitored closely by the Fed: any further deterioration in prices in the next two quarters would suggest that deflation is taking hold.

Inflation is non-existent, at least at this juncture of the Fed's and Congress' effort to re-liquefy credit markets and jump-start the U.S. economy. The U.S.'s pronounced recession has created price pressure -- not pricing power -- for businesses. Pricing power is so weak for firms that the U.S. Federal Reserve believes the nation is more likely to experience a bout of deflation -- not inflation -- at least through mid-2010, and perhaps for a longer period.

Further, another signal that inflation is not a problem at this time: Fed Chairman Ben Bernanke allocated little time to the issue of inflation in his speech at the Brookings Institution on Monday.
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