Underlying Inflation Slows in August

The underlying pace of U.S. inflation (search) moved a bit slower than expected last month with the advance over the last 12 months the smallest since February 1966, the government said on Tuesday.

While the overall Consumer Price Index (search), the most widely used gauge of U.S. inflation, rose 0.3 percent in August, the so-called core CPI inched up just 0.1 percent, the Labor Department said.

Economists polled by Reuters had expected the overall CPI to rise 0.4 percent with the core rate, which strips out volatile food and energy costs to provide a better view of underlying inflation trends, moving up 0.2 percent.

Over the last 12-months, the core CPI has risen just 1.3 percent — the tamest pace in over 37 years.

U.S. Treasury securities prices moved higher, but the dollar was little changed after the report, which came shortly before Federal Reserve officials gathered to discuss interest-rate policy.

The central bank was expected to hold the benchmark overnight lending rate steady at a 45-year low of 1 percent and reiterate a concern over the potential for an already-low rate of inflation to fall further. The Fed is expected to announce its decision about 2:15 p.m. EDT.

"The numbers still suggest that inflation is in check and that (Fed) policy-makers will hold policy steady today," said Gary Thayer, chief economist at A.G. Edwards & Co. in St. Louis.

Energy costs rose 2.7 percent last month, the biggest increase since March and the primary factor behind the overall increase in consumer prices. Gasoline prices surged 6.2 percent, the biggest gain since February.

The report showed an increase in car prices of 0.5 percent, their biggest gain in five years. Tobacco prices also rose sharply, but airline fares, which are not adjusted for seasonal fluctuations, slid 1.6 percent.

The rise in energy costs kept overall goods prices from falling, but goods prices excluding food and energy dipped a bit.

Over the last 12-months, so-called core goods prices have fallen 2.5 percent, the biggest drop on records dating to 1958. In contrast, the cost of services has been rising steadily.

"For the United States, the disinflationary trend continues. The core rate continues to fall," said Sal Guatieri, senior economist at BMO Financial Group in Toronto.

The sharp drop in goods prices and a slowing in the rate of services inflation had given rise to concerns earlier this year that the U.S. faced a remote risk of deflation — a persistent drop in the overall level of consumer prices.

Most economists have said that risk has faded further as signs have emerged of faster U.S. economic growth. Many economists think gross domestic product is likely to advance around a 5 percent annual rate this quarter, which would mark a sharp pickup from the second quarter's 3.1 percent gain.

A separate report on Tuesday showed sales at U.S. chain stores fell last week, breaking a three-week run.

Sales dropped 0.3 percent last week, the Bank of Tokyo-Mitsubishi and UBS said, after rising 0.5 percent in the prior week. Compared with the previous year, sales for the week rose 4.1 percent, slowing slightly from a 4.4 percent gain the week before.