US consumer prices rose only 0.1 per cent in August, another sign that inflation remains tame and the Federal Reserve may leave interest rates unchanged when its policy board meets this month.

The Labour Department report defied expert predictions, as Wall Street analysts had foreseen an increase of 0.2 per cent in the consumer price index (CPI). More significantly, the core rate, which excludes food and energy, was also held to 0.1 per cent last month.

Sharply challenging traditional economic theory, consumer prices have remained in check in the face of a steadily expanding economy and the lowest unemployment rate - 5.1 per cent - in seven years.

For the year to August the CPI had been held to an increase of only 3.2 per cent.

The data appeared to confirm the absence of an immediate and serious inflation threat, as it followed an announcement earlier in the week that wholesale prices measured by the core rate fell 0.1 per cent in August, the first drop since March.

The Commerce Department also said yesterday that US retail sales rose just 0.2 per cent last month, despite predictions of a 0.7 per cent increase.

The report was another indication that the economy was not overheating and was not in need of an interest rate increase.

The US economy expanded at a robust annual rate of 4.8 per cent in the second quarter, with economists foreseeing a slowdown to around 3 per cent in the third.