Consumer prices rise in Aug. on higher gas prices

September 16, 2009 5:55:55 AM PDT
Consumer prices rose slightly in August due to higher gas prices, another sign the weak economy is keeping inflation in check.

Excluding volatile food and energy prices, the so-called "core" Consumer Price Index also rose slightly over the 12 months ending in August, but is well within the Federal Reserve's comfort zone. That means the central bank faces little pressure to raise its benchmark interest rate, a step it takes to ward off high inflation. The Fed has reduced the interest rate it charges banks for overnight loans to record low of nearly zero in an effort to revive the economy.

The Labor Department said Wednesday that the CPI rose 0.4 percent in August, after a flat reading in July. Wall Street economists expected a 0.3 percent increase, according to a survey by Thomson Reuters. Prices fell 1.5 percent in the past year, as gas prices dropped sharply from record levels last summer.

The core price index rose 0.1 percent, matching expectations. It rose 1.4 percent in the 12 months ending in August, the smallest increase in more than five years.

A 1.3 percent drop in the price of cars last month, the steepest fall in nearly 37 years, held back the core index. Discounts stemming from the government's Cash for Clunkers program - which provided rebates of up to $4,500 to consumers who traded in older cars for newer, more fuel-efficient models - caused the decline.

Gas prices rose 9.1 percent in August on a seasonally adjusted basis and accounted for 80 percent of the rise in the consumer price index. Still, gas prices are 30 percent below last year's record levels, when prices at the pump topped $4 a gallon.

Consumers have cut sharply back on their spending in response to the worst recession since the 1930s. That has made it difficult for retailers and manufacturers to raise prices, keeping inflation at its lowest levels in decades. Last month, the department said consumer prices fell 2.1 percent in the 12 months ending in July, the steepest drop since 1950.

Still, there are signs the economy is recovering and consumers may be willing to spend again. Retail sales jumped 2.7 percent in August, the Commerce Department said Tuesday, the biggest increase in more than three years.

And Federal Reserve Chairman Ben Bernanke said Tuesday the recession is likely over, though he noted that the economy isn't likely to grow fast enough to lower unemployment anytime soon. Most economists expect the jobless rate to top 10 percent next year, up from its current 9.7 percent.

"It's still going to feel like a very weak economy for some time," Bernanke said.

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