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Consumer prices in U.S. drop for first time in over a year

The cost of living in the U.S. unexpectedly dropped in August for the first time in more than a year, showing inflation still is falling short of the Federal Reserve's goal as policy makers meet.

The consumer-price index declined 0.2 percent, the first decrease since April 2013, a Labor Department report showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for unchanged. Excluding volatile food and fuel, the so-called core measure was unchanged, the first time it failed to increase in almost four years.

A drop in energy costs and muted global growth are helping contain inflation. Subdued price increases have allowed Fed officials, who conclude two days of meetings today, to keep interest rates at record lows even as they plan to end their unprecedented monthly asset purchase program in October.

"Inflation is certainly benign," said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly forecast the drop in prices. "Inflation is not a front-burner issue" for Fed policy makers. "The doves have the high ground on this one," he said, referring to central bankers who are less concerned about inflation. "They are not going to do anything with rates for a long time."

Estimates in the Bloomberg survey ranged from a 0.3 percent drop to a 0.1 percent advance.

Confidence among U.S. homebuilders rose in September to a nine-year high, showing the industry is gaining ground and will be a source of momentum for the economy, another report today showed.

The National Association of Home Builders/Wells Fargo sentiment measure climbed to 59, exceeding the highest estimate in a Bloomberg survey of economists, from 55 in August, the Washington-based group reported. Readings above 50 mean more respondents said conditions were good.

Stocks rose, extended yesterday's rally that was the biggest in a month, as investors assessed whether the drop in consumer prices will give the Fed room to keep interest rates lower for longer. The Standard & Poor's 500 Index climbed 0.2 percent to 2,003.52 at 10:01 a.m. in New York.

Another report today showed the current-account deficit unexpectedly shrank in the second quarter. The gap, the broadest measure of international trade because it includes income payments and government transfers, narrowed 3.5 percent to $98.5 billion from a revised $102.1 billion shortfall in the prior period, according to Commerce Department figures. The median forecast of economists in a Bloomberg survey called for the deficit to widen to $113.4 billion.

The narrowing was mainly caused by a smaller shortfall on secondary income, which at $21.4 billion was the least since 2006. The drop reflected payments of fines and penalties to the U.S. government.

The unchanged reading in core consumer prices was the first time they failed to rise since October 2010 and followed a 0.1 percent rise in July. Economists had forecast a 0.2 percent advance, according to the survey median.

Overall consumer prices climbed 1.7 percent in the 12 months ended in August, following a 2 percent year-over-year gain the prior month. The core measure also rose 1.7 percent from August 2013 after 1.9 percent in the prior 12-month period.

Energy costs declined 2.6 percent in August from a month earlier, the most since March 2013. Gas prices have been falling for almost three months, helping cushion household budgets. The average price of a gallon of regular unleaded gas was $3.38 as of Sept. 15, its lowest level since February, according to AAA, the largest U.S. motoring club.

Today's report showed food costs increased 0.2 percent in August after a 0.4 percent gain the prior month.

The core rate was held back by broad-based declines in prices, including airline fares, recreation, household furnishings, clothing and used cars and trucks.

The Fed's 2-percent inflation goal is based on the personal consumption expenditures index, the Commerce Department's price gauge that is tied to consumer spending. That measure climbed 1.6 percent in the 12 months through July and hasn't reached the 2-percent level since April 2012.

Fed officials were expected to discuss this week whether to emphasize that an increase in the federal funds rate depends on progress toward the twin goals of full employment and low and stable inflation, rather than guidance on time periods and dates.

The policy makers on the Federal Open Market Committee today also will release an updated set of projections for measures including unemployment and growth at the conclusion of their two-day meeting today.

The CPI is the broadest of three price gauges from the Labor Department because it includes all 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.

The Labor Department's gauge of wholesale prices, which includes 75 percent of all U.S. goods and services, was unchanged in August and followed a 0.1 percent rise the prior month, data showed yesterday. A separate report indicated the cost of imported goods fell 0.9 percent last month.

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