Underlying U.S. inflation slows to 37-year low; economy not yet safe from the dangers of deflation

NEW YORK, Sept 16 (Reuters) - U.S. consumer prices rose less than expected in August despite a surge in energy costs and underlying inflation fell to the slowest annual rate in 37 years, the government said on Tuesday in a report that suggests the economy is not yet safe from the dangers of deflation.

That means the Federal Reserve, at its policy meeting on Tuesday, will likely repeat its pledge to keep the federal funds rate, now at a 45-year low of 1 percent, for a "considerable" amount of time, even as economic growth has sped up notably.

The core Consumer Price Index, which strips out the impact of volatile food and energy prices and is viewed as a better gauge of inflation trends, dropped to a 1.3 percent annual rate in August from 1.5 percent the prior month, the Bureau of Labor Statistics said.

The main CPI gauge rose 0.3 in August, below economists' forecasts of a 0.4 percent gain. The core CPI edged up just 0.1 percent for the month, also below expectations.

For the past year, the annual rate of underlying inflation has beem cut almost in half, dropping from 2.4 percent to its current 1966 low. Some Federal Reserve officials have said the large amount of slack in the economy means that pace will ease further next year.

To prevent the inflation slowdown from turning into a persistent decline in prices, or deflation, Fed officials have vowed to keep interest rates low or cut them deeper, if needed.

"For the United States, the disinflationary trend continues. This portrays an economy operating with a lot of slack, that is, unused capacity. As a result the Fed will continue to be concerned with the risk of deflation," said Sal Guatieri, senior economist at BMO Financial Group in Toronto.

"Therefore it will continue to hold interest rates low despite expected strong growth in the quarters ahead," he said.

The unemployment rate stands near a nine-year high of 6.1 percent and the economy shed 93,000 jobs last month. The industrial sector is using only 74.6 percent of its capacity, a 20-year low, and most economists believe that until economic growth expands briskly for several quarters to soak up that slack, inflation will keep declining

"We obviously remain in a very low-inflation environment and the Fed won't be raising rates any time soon until they see these numbers start to creep up a little bit," said Jay Bryson, global economist at Wachovia Securities in Charlotte, North Carolina.

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 new car prices of 0.5 percent, the biggest gain in five years, even as zero-percent financing and big rebates remained in place. Used car prices plunged.

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. The cost of services has been rising at a much faster pace, but even here, there has been some slowing in recent months.

Inflation-sensitive U.S. Treasuries cut losses on the data, but stocks and dollar mostly overlooked the news.

Weekly chain store sales reports showed that the recent tax cuts continue to give a strong lift to retail sales this quarter, one of the reasons why gross domestic product is seen expanding by 5 percent or more this quarter, up from 3.1 percent in the prior quarter.

According to the Redbook report from Instinet Research, sales were up at a 3.4 percent annual pace in the Sept. 13 week, compared with a 3.6 percent rate the prior week.

Wal-Mart Stores WMT.N said on Monday its sales this month were on the high end of its forecasts, coming after its August sales were the best in more than a year. Target Corp. TGT.N said sales were running ahead of its expectations this month.

Underlying U.S. inflation slows to 37-year low; economy not yet safe from the dangers of deflation

I do agree that deflation is a potential danger to the economy - however, if the inflation rate were to increase slightly next month, signaling a reduction in the danger of the happening, Reuters would, without missing a beat, trumpet that shift with a blaring headling that inflation was heating up, endangering the economy.

One week it is "not enough inflation the sky is falling." The next week will be "too much inflation the sky is failling." No matter what is the situation some people will see the strong US economy as some fragile thing that is about to burst, and BTW they are several even on this forum that belong to this bubble boy club.

This is somewhat deceptive.

What companies do is "downsize" their products and sell at the same price as the previous product. No price increase--true; but a reduction in amount.

Coffee, for example, used to be sold in 3 pound (48 ounce) cans. The can size and the price remained the same, but the contents were reduced to 39 ounces. This past spring, I noticed that the 39 ounce label had changed, and is now 34.5 ounces. The prices didn't go down to reflect the reduction is contents.

I also noticed the same pattern with boxed breakfast cereal. A couple of the types I usually buy dropped from 18 ounce boxes to 15 ounce boxes (note that the box sizes didn't change, just the content amount changed).

While it may not technically be inflation, we are being charged the same or more for less content. Look at gasoline prices---no inflation?

Any statistician can make figures/calculations tell any story he wants.

"The core Consumer Price Index, which strips out the impact of volatile food and energy prices and is viewed as a better gauge of inflation trends."
Why is this a better gauge of inflation except to benefit the politicians? Anyone living in the real world knows that housing, food, gas (things that impact regular people) are all going through the roof.

A price rise is not inflation. Inflation is a sustained rise in the price level not just one or two items.

Gasoline prices will fall in the coming months but that also does not mean deflation.

Comparing prices when sizes change is problematic but it is even more complicated comparing price levels when products change. How does a car today compare with a car of 1960? Or a CD with a record? TVs today are far cheaper than in the past even in current dollar prices so are computers.

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