Consumer Prices Rise Only for Gasoline and Food

WASHINGTON -- Consumer prices rose slightly last month, driven up by higher costs for gasoline and food. But excluding those volatile categories, prices were flat.

The Labor Department said Friday that the Consumer Price Index rose by 0.1 percent in September, after a 0.3 percent rise in August. Economists polled by Thomson Reuters expected a larger increase.

Outside of food and energy, core consumer prices were unchanged for the second straight month. And in the past 12 months, core prices rose by only 0.8 percent, the smallest yearly gain in more than 49 years.

The sluggish economy is keeping a lid on prices. Consumers are holding back on spending, with unemployment high and wages stagnant. That makes it difficult for retailers to pass on any price increases.

The modest price increases mean that 58 million Social Security recipients won't receive any cost-of-living increases in their benefits next year, for the second straight year. It will be only the second year without an increase since automatic adjustments for inflation were adopted in 1975.
Moderate price inflation also allows the Federal Reserve to keep the short-term interest rate it controls at a record low of nearly zero, where it has been since December 2008.

Low inflation makes it more likely the Fed will launch another effort to reduce longer-term rates by purchasing Treasury bonds, a step known as "quantitative easing."

Fed policymakers signaled at their last meeting in September that they were nearing such a step. Most economists expect the central bank will announce the program at its Nov. 2-3 meeting.
A 1.6 percent increase in the price of gas drove energy costs higher by 0.7 percent. And the prices of meat, cereals and baked goods, and dairy products also rose, the department said.
Clothing prices fell by 0.6 percent in September, the second straight drop. And weakness in the housing market sent housing prices down 0.1 percent, according to the government's index. That measure also includes hotel prices, which dropped by 0.2 percent in September.

The flat reading on core consumer prices could raise fears of deflation, a widespread and crippling drop in prices, wages and the value of homes and investments. Deflation concerns arose earlier this year, after consumer prices fell for three straight months in the spring and early summer.

But few economists expect deflation to take hold. Fed officials said last month that "inflation remained subdued," according to the minutes from the meeting, which were released earlier this week. At the same time, they saw "only small odds of deflation."