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Wednesday May 27th, 2015 9:50AM

Consumer prices up slightly in August

By The Associated Press
WASHINGTON (AP) -- U.S consumer prices barely rose last month, the latest sign that slow economic growth is keeping inflation tame.

The consumer price index increased just 0.1 percent in August, the Labor Department said Tuesday, after a 0.2 percent increase in July. Excluding volatile food and energy costs, core prices also rose just 0.1 percent.

In the past 12 months, prices have risen 1.5 percent. That's down from the 2 percent year-over-year gain in July and below the Federal Reserve's 2 percent inflation target. Core prices are 1.8 percent higher than a year ago, the largest 12-month gain since March.

The increase in core prices could help persuade the Fed to start pulling back on its low interest rate policies. But significantly lower inflation would pressure the Fed to keep stimulating the economy.

Most economists expect that the Fed will begin to reduce its bond buying by about $10 billion on Wednesday, according to a survey by The Associated Press. The bond purchases are intended to lower longer-term interest rates and encourage more borrowing and spending. Fed Chairman Ben Bernanke first signaled in late May that the Fed could begin slowing its purchases before the end of the year.

On Tuesday, many economists stuck with that predicting after seeing the report on consumer prices.

"We don't think this will prevent the Fed from tapering ... the danger of very low core inflation has passed," Paul Dales, an economist at Capital Economics, said in an email to clients.

Falling apartment vacancy rates will likely keep pushing rents higher, Dales said, and higher cotton costs should also lead to higher clothing prices. Last month, the cost of renting an apartment or home rose 0.4 percent, the most in 10 months.

Some Fed officials have objected to reducing the purchases when inflation is below the 2 percent target. A small amount of inflation can be good for the economy, because it encourages consumers and businesses to spend and invest before prices rise further.

Tuesday's report showed gas prices slipped 0.1 last month, the first drop since April, giving drivers some relief. Food prices ticked up 0.1 percent, pushed higher by more expensive fruits, vegetables and meats.

New-car prices were unchanged. Travel costs eased: Air fares plunged 3.1 percent, the third straight drop. Hotel prices fell 0.7 percent.

The economy grew at a 2.5 percent annual rate in the April-June quarter, up from just a 1.1 percent rate in the first three months of the year. But since then, consumer spending has been modest and businesses have spent less on big-ticket items such as industrial machinery and computers. That's led many economists to lower their forecasts for the July-September quarter to a 2 percent annual rate or less.
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