Consumer prices edged down 0.2 per cent last month following a tiny 0.1 per cent gain in July, the Labor Department reported Wednesday. It was the first decline since a similar 0.2 per cent drop in April 2013. Core prices, which exclude energy and food, were unchanged in August, the first time there hasn't been an increase since October 2010.
Over the past 12 months, overall prices and core prices are both up a modest 1.7 per cent. These gains are well within the 2 per cent annual increase for inflation that the Federal Reserve considers optimal.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that the drop in prices would give a "powerful boost" to "doves" on the Fed, officials who argue that at the moment unemployment and weak economic growth are bigger problems than the threat of future inflation.
Analysts believe that inflation will remain moderate in coming months, helped by falling energy prices. AAA reports that the nationwide average for a gallon of gasoline is down to $3.38, down eight cents from a month ago and 14 cents lower than a year ago.
The recent decline in gasoline prices is one reason that economists are optimistic that consumer spending will show solid gains in the coming months. A drop in gasoline prices means consumers will have more to spend on other items.
For August, energy prices fell 2.6 per cent, the second straight monthly decline. Gasoline costs were down 4.1 per cent in August after a smaller 0.3 per cent July drop.
Food costs edged up 0.2 per cent in August following a 0.4 per cent July. Over the past 12 months, food costs have risen 2.7 per cent reflecting drought in California that has cut into crop yields.
The cost of new vehicles and alcoholic beverages were up in August but the price of airline fares, recreation, home furnishings, clothing and used cars were all down.
The report on consumer prices was released as the Federal Reserve wrapped up two days of discussions Wednesday on what to do with interest rates.
The Fed seeks to promote maximum employment and stable prices, which the Fed defines as inflation rising at a moderate 2 per cent annual rate. Price increases measured by the Fed's favourite inflation gauge have been running below 2 per cent for the past two years.
That has given the central bank the leeway to keep interest rates ultra-low in an effort to combat an anemic economic recovery. However, some critics say the Fed needs to start raising rates in coming months to make sure its prolonged period of easy credit policies does not set the stage for future inflation problems.