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Article updated: 9/17/2013 9:25 AM

Consumer prices rose less than forecast in August

Back-to school fashions at JC Penney in New York. The cost of living in the U.S. rose less than forecast in August, a sign it will take time for inflation to reach the Federal Reserve’s goal.

Back-to school fashions at JC Penney in New York. The cost of living in the U.S. rose less than forecast in August, a sign it will take time for inflation to reach the Federal Reserve's goal.

 

Associated Press

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By Bloomberg News

The cost of living in the U.S. rose less than forecast in August, a sign it will take time for inflation to reach the Federal Reserve's goal.

The consumer-price index increased 0.1 percent, the least in three months, after a 0.2 percent gain in July, Labor Department figures showed today in Washington. The median forecast in a Bloomberg survey of economists called for a 0.2 percent gain in August. The core measure, which excludes food and fuel, also rose 0.1 percent last month.

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The figures come as Fed policy makers meet today and tomorrow to debate whether economic growth is strong enough to begin slowing the pace of bond purchases. Central bankers have said they are also watching prices to ensure the U.S. doesn't slip into a long period of diminishing increases, or disinflation, that damages the expansion.

"There's still quite a bit of slack in the labor market, wage gains are positive but have been modest," said Ryan Wang, an economist at HSBC Securities USA Inc. in New York who correctly forecast the gain in the CPI. "The Fed is committed to defending their 2 percent inflation goal from both sides, and currently inflation is running below that goal."

Stock-index futures were little changed after the figures as the Fed prepared for its two-day meeting. The contract on the Standard & Poor's 500 Index expiring in December rose 0.1 percent to 1,692 at 8:55 a.m. in New York.

Economists' Estimates

Estimates in the Bloomberg survey of 87 economists ranged from no change to a gain of 0.3 percent.

The increase in consumer prices last month was led by medical care, prescription drugs, rents and tobacco. Declines in utility gas service, gasoline and airfares limited the advance.

The August increase in the core gauge was the smallest in four months and followed a 0.2 percent gain in July. Economists projected a 0.2 percent increase in August, according to the survey median.

Overall consumer prices increased 1.5 percent in the 12 months ended in August after a 2 percent year-over-year gain the prior month.

The core CPI climbed 1.8 percent from August 2012, following a 1.7 percent advance in the prior 12-month period.

Medical Care

Medical care services climbed 0.7 percent in August, the most since September 2010. Owners equivalent rent rose 0.2 percent and tobacco prices climbed 0.4 percent.

Airfares dropped 3.1 percent, the most since November 2008. Gas services provided by utilities decreased 2.3 percent, while gasoline prices fell 0.1 percent.

Energy costs decreased 0.3 percent from a month earlier, while food costs rose 0.1 percent.

With inflation under control, paychecks are barely rising. Hourly earnings adjusted for inflation increased 0.1 percent in August, and were up 0.7 percent over the past 12 months, separate figures from the Labor Department showed today.

McDonald's Corp. is among companies limiting price increases as it strives to lure customers. The world's largest restaurant chain, based in Oak Brook, Illinois, is also working to draw cash-strapped Americans with new products after its U.S. same-store sales climbed less than analysts projected.

Luring Customers

"It is critical to maintain our value proposition by keeping price increases at or below key inflation indices," Peter Bensen, chief financial officer, said on a Sept. 10 earnings call. "With projected 2013 food away from home inflation of 2.5 percent to 3.5 percent, we want to maintain pricing flexibility as we balance future price increases with our desire to continue to grow traffic and market share."

Other companies indicate that higher raw materials costs will keep inflation from slowing further.

"You're seeing cost-push inflation work its way through the supply chain in apparel," Richard Noll, chief executive officer of Hanesbrands Inc., the Winston Salem, North Carolina- based maker of Hanes underwear and Playtex bras, said at a conference on Sept. 11. "We're going to be in a moderately inflationary environment."

Fed policy makers have warned of the risks of prolonged inflation below their 2 percent target, while economists project the central bank will start reducing its $85 billion in monthly asset purchases as soon as this week as the economy shows improvement.

Fed Chairman Ben S. Bernanke has said low inflation could cause the recovery to bog down by inhibiting capital investment and increasing the risk of "outright deflation," a broad-based decline in prices.

"Very low inflation poses risks to economic performance," he told lawmakers July 17. "We will monitor this situation closely."

The CPI is the broadest of three price gauges from the Labor Department because it includes goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

Wholesale prices grew 0.3 percent in August, Labor Department data showed Sept. 13. Import prices were little changed last month, the agency said a day earlier.

--With assistance from Ainhoa Goyeneche and Tori Stilwell in Washington. Editor: Vince Golle

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwelliszbloomberg.net

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