WASHINGTON -- Consumer prices fell for the first time in nearly 1-1/2 years in August and underlying inflation pressures were muted, which could lessen the urgency for the Federal Reserve to raise interest rates.
The Labor Department said Wednesday its Consumer Price Index dropped 0.2 percent last month as a broad decline in energy prices offset increases in food and shelter costs.
It was the first decrease since April last year and followed a modest 0.1 percent gain in July. Economists had expected consumer prices would be flat in August.
"There is still enough slack in the economy to keep a tight lid on price increases, which should support the view of those within the Fed arguing in favor of patience before the first rate hike," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.
The U.S. central bank wraps up a two-day meeting on Wednesday and some investors and economists think it could use its policy statement at 2 p.m. Eastern time to begin to lay the groundwork for an eventual rate hike.
Concerns at the Fed that inflation was running too low had abated in recent months, but the CPI data suggested a quickening of inflation during the spring may have run its course.
The CPI increased 1.7 percent in the 12 months through August, the smallest advance in five months, while a core index that strips out food and energy prices was up by the same amount, marking a slowdown from July's 1.9 percent gain.
Month-on-month, the core index was unchanged for the first time since October 2010.
The Fed targets 2 percent inflation and tracks an index that is running even lower than the CPI.
Many economists think the central bank could raise interest rates as soon as next June, while interest rate futures point to July for the first rate hike. It has kept benchmark overnight lending rates near zero since December 2008.
Wage Growth Sluggish
The dollar was steady against a basket of currencies, while prices for U.S. government debt rose marginally on the data. U.S. stocks were trading slightly higher.
While the economy appears to be on sustainable growth path, anemic wage growth is dampening price pressures. Average hourly earnings adjusted for inflation rose 0.4 percent in August. Even so, they have risen only by that same amount over the past year.
The upbeat housing report, and better-than-expected earnings from homebuilder Lennar Corp, pushed up housing stocks, which were solidly outperforming the broader market. The S&P homebuilding index was up 4.7 percent.
"While an inflationary surge is not in the offing, with the economy continuing to recover in the second half, there is a better than even chance for a modest acceleration in inflation," said Steve Blitz, chief economist at ITG in New York.
In August, energy prices fell for a second straight month, recording their biggest decline since March 2013. There were broad declines in energy prices, with the cost of gasoline falling by the most since April last year.
Food prices rose 0.2 percent after advancing 0.4 percent in July as the effects of a drought in California lingered.
A second straight month of sharp declines in airline fares dampened the core CPI. Falling apparel and used car prices also weighed. Recreation prices recorded their largest drop since December 2009, while household furnishings declined and college tuition and fees saw their biggest fall in almost 27 years.
While rents increased, the pace moderated a bit from July. Prices for alcoholic beverages posted their largest increase since January 2007.
9 Numbers That'll Tell You How the Economy's Really Doing
Consumer Prices Post First Drop in Nearly 1½ Years
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.