Inflation Remains Virtually Dormant

WASHINGTON — Consumer prices were nearly flat in August as the costs of gasoline and other energy products tumbled. With inflation low, the Federal Reserve has leeway to cut interest rates further to deal with the economic fallout from the terrorist attacks, analysts said.

The Labor Department reported Tuesday that its consumer price index, a closely watched inflation gauge, inched up 0.1% last month. In July, consumer prices fell 0.3%, the biggest drop in 15 years.

The “core” rate of inflation, which excludes energy and food prices, rose for the second straight month by 0.2%.

Even with the small uptick, analysts said inflation continued to be tame, a bit of good news as the Fed tries to keep the economy from tipping into a recession.

“With inflation remaining dormant, additional policy prescriptions needed to shore up the economy in the wake of last week’s terrorist attacks have just been made easier,” said Jerry Jasinowski, president of the National Assn. of Manufacturers.

The Fed cut short-term interest rates Monday for an eighth time this year, pushing borrowing costs down to their lowest point in nine years. As part of a global effort led by the Fed to calm anxious investors, central banks in Europe, Canada and Japan also eased credit. Economists believe the Fed is likely to cut rates again at its Oct. 2 meeting.

During the first eight months of this year, consumer prices rose at an annual rate of 2.5%, compared with an increase of 3.4% for all of 2000.

The latest reading on consumer prices “suggests there is no inflationary threat whatsoever and thus they have room for further rate cuts as necessary to help stabilize capital markets and counter the economic weakness,” said David Jones, chief economist at Aubrey G. Lanston & Co.

In August, energy prices fell 1.9%, after a big 5.6% drop in July. Gasoline prices declined 2.4%, natural gas 3.4%, fuel oil 1.2% and electricity 0.4%, the largest drop in 15 months.

The Bush administration expressed hope Monday that the Organization of the Petroleum Exporting Countries would take steps to avert supply shortages and keep prices stable. OPEC ministers are to meet next Wednesday in Vienna to determine production levels.

The inflation report also showed that food prices rose 0.2%, down slightly from 0.3% in July. Medical care costs went up 0.5% in August, after edging up 0.1%.