WRAPUP 2-US consumer prices ease on cheaper energy

(Recasts; adds Fed decision on rates, home builders' index, updates market reaction)

By Glenn Somerville

WASHINGTON, Sept 16 (Reuters) - U.S. consumer prices posted their first monthly drop in nearly two years during August as a weakening global economy cut energy costs and relieved some inflation pressures, government data showed on Tuesday.

The Labor Department's consumer price index, the most widely used gauge of inflation, eased 0.1 percent last month after jumping 0.8 percent in July. However, core prices, which exclude volatile food and energy items, were up 0.2 percent in August following a 0.3 percent July gain.

Though analysts speculated the data would make it easier for the Fed to cut interest rates, policy-setting members of its Federal Open Market Committee announced this afternoon they were holding the benchmark federal funds rate at 2 percent.

The news on consumer prices was a bright spot in a turbulent day as policy-makers struggled to contain a growing crisis in financial markets, focused for most of Tuesday on troubled insurance giant American International Group (AIG.N).

In a statement announcing its decision to keep interest rates steady, the Fed said earlier spikes in energy prices had contributed to a "highly uncertain" inflation outlook, though it said it expected price pressures to moderate later this year and in 2009.

The CPI report showed that energy costs tumbled 3.1 percent in August, the biggest drop since October 2006, after rising 4 percent in July. As the global economy has lost steam, demand for oil has waned and that has brought prices down.

By the close of trading, stock prices had reversed course and posted brisk rises. The Dow Jones industrial average .DJI closed up 1.3 percent to end at 11,059 points and the Nasdaq Composite Index .IXIC rose 1.28 percent to 2,207.

Core prices rose 2.5 percent on a year-over-year basis in August, the same as the yearly rise posted in July.

There were signs that consumers were growing cautious about spending in the face of higher prices for many goods and increasing turmoil in financial and housing markets.

U.S. chain store sales slid 1.1 percent in September so far compared with August, though they were 1.4 percent higher in the week ended Sept. 13 from the comparable week a year earlier, according to Redbook Research.

Signs of slowing sales also prompted the International Council of Shopping Centers to lower its forecast for comparable store sales at chain retailers to 1.5 percent to 2.0 percent for September, from an earlier forecast of 2.0 percent.

Housing costs fell 0.1 percent last month, the first decline since early 2003, after climbing 0.6 percent in July. Transportation costs declined 1.5 percent after a 1.7 percent rise in July as gasoline prices dropped 4.2 percent.

A separate report from the National Association of Home Builders showed builder sentiment brightened in September for the first time in seven months, Its preliminary NAHB/Wells Fargo Housing Market Index rose two points to 18, up from its record low of 16 of the previous two months.

A severe housing downturn is at the root of many of the problems bedeviling the U.S. financial sector, with home foreclosures soaring, prices tumbling and builders trying to scale back on stock of unsold homes. (Additional reporting by Herb Lash in New York and Ros Krasny in Chicago; Editing by Tom Hals, Gary Crosse)