09/17/2013 08:47 EDT | Updated 11/17/2013 05:12 EST

US consumer prices tick up 0.1 per cent in August as inflation remains tame

WASHINGTON - 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 per cent in August, the Labor Department said Tuesday, after a 0.2 per cent increase in July. Excluding volatile food and energy costs, core prices also rose just 0.1 per cent.

In the past 12 months, prices have risen 1.5 per cent. That's down from the 2 per cent year-over-year gain in July and below the Federal Reserve's 2 per cent inflation target. Core prices are 1.8 per cent 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 low 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 signalled in late May that the Fed could begin slowing its purchases before the end of the year.

Some Fed officials have objected to reducing the purchases when inflation is below the 2 per cent 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 per cent, pushed higher by more expensive fruits, vegetables and meats.

The cost of renting an apartment or home rose 0.4 per cent. New-car prices were unchanged. Travel costs eased: Air fares plunged 3.1 per cent, the third straight drop. Hotel prices fell 0.7 per cent.

The economy grew at a 2.5 per cent annual rate in the April-June quarter, up from just a 1.1 per cent 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 per cent annual rate or less.