US consumer prices increased slightly more than expected in August as food prices rebounded and energy costs remained elevated but core prices were flat, keeping the risk of deflation alive.
The Labor Department said today its seasonally adjusted Consumer Price Index rose 0.3 per cent after rising 0.3 per cent in July. That was a touch above financial markets' expectations for a 0.2 per cent increase.
But excluding volatile energy and food prices, the closely watched core measure of consumer inflation was unexpectedly flat after edging up 0.1 per cent in July.
US government bond prices rallied as some analysts viewed the flat core reading as a sign deflation remained a threat to an economy struggling to recover from its worst recession since the 1930s.
US stock index futures held their gains, while the dollar was little changed.
“If core inflation comes in flat, the threat of deflation hasn't passed yet. We are still at a stage of the economy where there is growth but it's not strong enough to bring down unemployment," said Gus Faucher, director of macroeconomics at Moody's Analytics in West Chester, Pennsylvania.
Most analysts expect the Federal Reserve to renew its pledge to keep monetary policy accommodative, but not to announce any new steps to ease monetary policy, when it meets on Tuesday to assess the economy.
Many, however, believe the Fed will resume large-scale asset purchases in coming months to drive long-term interest rates lower to spur the economy and keep deflation risks at bay.
The US central bank already has cut overnight interest rates to near zero and pumped more than $1.7 trillion into the economy through purchases of Treasury and mortgage-related debt.
Data yesterday showed prices paid at the farm and factory gate increased 0.4 per cent in August.
"There is no inflation. There is no deflation. It's disinflation," said John Canally, an economist at LPL Financial in Boston.
In the 12 months to August, the CPI rose 1.1 per cent after a 1.2 per cent increase the prior month. The increase was in line with market expectations. Last month energy prices rose 2.3 per cent after increasing 2.6 per cent in July, while gasoline prices were up 3.9 per cent. Food costs rebounded 0.2 per cent from July's 0.1 per cent drop.
The monthly core inflation rate was dampened by shelter costs, which were flat and weak prices for apparel. However, new vehicle prices increased 0.3 per cent, the largest gain since November, after rising 0.1 per cent in July. Prices for used cars and trucks increased 0.7 per cent after rising 0.8 per cent the prior month.
In the 12 months to August, the core inflation rate rose 0.9 per cent after a similar increase in July. Markets expected an increase of 1.0 per cent.
Reuters