U.S. consumers paid more for gasoline last month but found stable or even falling prices for many other items, according to a government report released yesterday, which eased inflation fears in financial markets.
The Labor Department's consumer price index rose 0.3 percent in August, which was in line with analysts' expectations. But the "core" CPI, which excludes the often volatile food and energy components, rose a less-than-expected 0.1 percent.
The core rate, which many economists view as the better measure of price trends, has been rising at an annualized rate of 1.6 percent so far this year, below last year's pace.
Financial markets initially reacted favorably to the report, with the Dow Jones industrial average rising more than 100 points in early trading yesterday. But later the market reversed course and the Dow ended the day down 108.91 points at 10,801.42.
While the CPI has increased so far this year at annual rate of 2.6 percent, much of that is the result of a 15.4 percent annualized increase in energy costs. Energy prices, which dropped sharply last year, have rebounded this year since an agreement by oil-exporting nations to limit their output. Gasoline prices alone rose 5.6 percent in August.
Last year, because of declining energy prices, the CPI rose less than the core rate. But this year, rising energy prices are driving the CPI up faster than the core rate.
Some analysts said they believe Federal Reserve policymakers will focus on the core rate when they next meet, on Oct. 5, to decide whether to raise interest rates for a third time this year to prevent a surge in inflation.
"Fed officials have emphasized that it is the core rate, excluding food and energy, which they consider more important for monetary policy," said First Union Capital Markets chief economist David Orr. "If they are actually using the core CPI as their 'bogey,' then the recent trend should keep them on the sidelines on October 5."
Among items that fell in price last month were apparel, new cars, toys, computers, tickets to movies and sporting events, and air fares. Prices rose for medical care, including prescription drugs and cable television, the report said. Economists continue to marvel at the economy's ability to grow at a high rate without any real evidence of widespread inflation. Some credit the advent of new technology, such as computers and the Internet, which are allowing workers to become more productive. Changes in world trading patterns also mean U.S. consumers can purchase a wider array of low-cost imports, which help hold down prices for competitive U.S. goods.
"We continue to have competition from imports and excess capacity, which is holding down the prices of apparel and new cars," said Bank of America Private Bank economist Lynn Reaser. "Second, we have new technology, which is causing computer prices to plummet. Third, deregulation and greater competition is holding down prices somewhat in health care and phone service."
Jerry Jasinowski, president of the National Association of Manufacturers, said yesterday that he sees no need for the Fed to raise rates. "It's clear from today's report that inflation is still on an extended vacation," he said. "Raising interest rates further to downshift the economy by slowing consumption is not warranted at this time."
Still, some economists believe the Fed may consider raising rates simply because the economy continues to grow faster than analysts believe Chairman Alan Greenspan would like. Labor markets also remain very tight, with the nation's unemployment rate in August at 4.2 percent--a 29-year low.
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