Consumer prices fell for the first time in 14 years last month, led by a big - but temporary - drop in the cost of gasoline, the Labor Department said yesterday.
But economists said that even figuring in significantly higher prices at the pump this month, the U.S. economy is showing enough signs of cooling off that the Federal Reserve won't see the need to increase interest rates anytime soon.
The Consumer Price Index, the most closely watched indicator of inflation in the United States, unexpectedly dropped 0.1 percent last month, its first monthly decline since August 1986.
Gasoline prices were the biggest factor, descending 6 percent from July to early August - the largest drop since February 1991, at the end of the Persian Gulf war.
However, the CPI's so-called core rate - which excludes volatile food and energy prices, and which is more closely watched - rose 0.2 percent.
Economists had expected a 0.2 percent increase in both the overall index and the core rate of the CPI.
Stocks responded by continuing their recent slide. The Dow Jones industrial average fell 160.47 points, or 1.45 percent, to close at 10,927, while the Nasdaq composite index slid 78.62 points, or 2.01 percent, to end the week at 3,835.24.
For the first eight months of this year, the CPI's core rate rose at a 2.6 percent annual clip, compared with a 1.5 percent pace at the same time a year ago. The overall CPI rose at a 3.4 percent rate, compared with a 2.3 percent clip last year.
Despite the increases, both rates remain below levels most economists would label as inflationary.
The CPI's core rate is the indicator most closely watched by the Federal Reserve in its ever-vigilant search for inflation, the upward spiral in prices that can erode living standards and stop an economy in its tracks.
Economists said the Fed - even with the knowledge that energy prices rose in late August and early September - will likely stay on the sidelines Oct. 3, when its policymaking Federal Open Market Committee next meets.
However, as a symbol of its vigilance, the FOMC is expected to maintain its bias toward tightening credit.
"With the economy cooling off, there will be a reluctance to lift rates," said Gary Thayer, chief economist for A. G. Edwards in St. Louis.
The FOMC has raised interest rates six times between June 1999 and May of this year, and its decision to shun a seventh increase at either of its past two meetings is due to the noticeable slowing in the economy that its interest-rate increases have helped bring about, economists said.
Concerns are moderating
Richmond Fed President Alfred Broaddus, a voting member of the FOMC, said after the CPI report was released that he was less worried about inflation now than he was a few months ago.
"I think the balance of risk, while still tilted to the upside, is a closer balance than several months ago," he said. "The degree [of inflation concerns] has moderated somewhat."
While the report painted a relatively benign picture of overall inflation in August, it also showed that prices for medical care, clothes, housing and transportation are creeping higher. About 55 percent of the CPI stems from the prices of services. Airfares rose 1.5 percent last month and could rise more as oil prices push the cost of jet fuel higher.
Consumer food prices - roughly one-fifth of the index - rose 0.2 percent in August. Prices rose nearly across the board, led by a 2.3 percent gain in the price of fresh vegetables.
"Inflation was a no-show in August, but it's too early to ignore it," warned Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis.
Consumers who do ignore inflation won't be able to overlook the pain of high prices at the gasoline pumps in the months to come. The price of crude oil this week rose to a 10-year high, and the price of gasoline jumped by 8 cents a gallon between early August and the first part of September.
With all the driving they do, and with winter approaching, consumers clearly will feel the pinch of higher energy costs - despite the big one-month drop chronicled by the August CPI report.
"In the United States, energy prices have been rising," said John Lonksi, chief economist at Moody's Investors Service in New York.
"If you go to the average American and tell them energy prices declined in the month of August, you would think there was perhaps something loose upstairs."
Other economic reports
Several other economic reports were released yesterday.
U.S. industrial production rose more than expected in August, chiefly because warmer temperatures kept utilities cheaper than in previous months. A second report said that business inventories rose at their slowest pace in more than a year in July.
Also, the Labor Department said average weekly earnings adjusted for inflation rose 0.1 percent in August, an increase viewed as mild and not inflationary.
Wire services contributed to this article.