* Consumer price index rises 0.1 percent in August
* Core CPI up 0.1 percent, medical costs and rents rise
* Year-on-year CPI up 1.5 percent, core CPI up 1.8 percent
By Lucia Mutikani
WASHINGTON, Sept 17 U.S. consumer prices barely
rose in August, but rising rents and medical care costs pointed
to some stability in underlying inflation that could make the
Federal Reserve more comfortable trimming its bond purchases.
The Labor Department report on Tuesday showed inflation
largely under wraps, but some details suggested a down drift in
prices earlier in the year had probably run its course.
"This should give policymakers greater confidence that the
inflation soft patch in the first half was indeed transitory,"
said Joseph LaVorgna, chief economist at Deutsche Bank
Securities in New York. "As a result, some fence-sitting
participants may feel marginally more comfortable proceeding
with a mini-taper of quantitative easing."
Fed officials were set to meet on Tuesday and Wednesday to
deliberate on monetary policy. Most economists expect the U.S.
central bank to announce a scaling back of the $85 billion in
bonds it has been buying each month at the end of the meeting.
The Labor Department said its Consumer Price Index edged up
0.1 percent last month as the cost of energy fell and food
prices remained muted. The CPI had risen 0.2 percent in July. In
the 12 months through August, it increased at a slow 1.5 percent
pace after advancing 2.0 percent in the 12 months through July.
Stripping out the volatile energy and food components, the
so-called core CPI rose 0.1 percent after increasing by 0.2
percent in each of the past three months. Rents and medical care
accounted for most of the increase in the core CPI.
The latest gain took the increase in the core index over the
past 12 months to 1.8 percent, the largest rise since March. The
core CPI had gained 1.7 percent in July.
Earlier in the year core inflation was moving lower, and
reached levels that caused unease among some Fed officials. It
touched a two-year low of 1.6 percent in June, but has been
inching up for the last two months.
LOW INFLATION TEMPORARY?
The Fed targets 2 percent inflation, although it tracks a
gauge that tends to run a bit below the CPI. Fed Chairman Ben
Bernanke has viewed the low inflation as temporary and expects
prices to push higher as the economy strengthens.
The inflation data supported prices for long-dated U.S.
government bond prices. The dollar was marginally lower against
a basket of currencies, while U.S. stocks were trading higher.
Interest rates have risen over the past few months in
anticipation of the Fed's taper announcement. There is little
sign, however, that high mortgage rates are putting a damper on
A separate report showed confidence among homebuilders
unchanged near eight-year highs in September.
Last month, inflation was held back by a 0.3 percent drop in
energy as the cost of gasoline, electricity and natural gas
fell. Energy prices had increased 0.2 percent in July. Food
prices gained 0.1 percent, rising by the same margin for a
second straight month.
Away from food and energy, there were pockets of pricing
power, with housing and medical care costs advancing.
There were gains in rent, which accounts for about a third
of the core CPI. Owners' equivalent rent of primary residence
posted its largest gain since November 2008.
Demand of rental housing has been rising as Americans shift
away from owning a home. Rising mortgage rates could ensure that
trend remains entrenched for a while.
Medical care costs rose 0.6 percent, the largest increase
since July 2007. Prescription drugs also recorded their biggest
rise since July 2007. Medical care, which makes up more than 9
percent of the core, has been one of the key contributors to the
low inflation early in the year.
"What consumers are saving on gas they are paying for in
medical care and rent," said Jay Morelock, an economist at FTN
Financial in New York. "Even with consumer prices in check,
however, the year-over-year increase in rents will support the
case for tapering."
On a year-on-year basis, rent of shelter posted its largest
rise in five years.
But some economists do not think core prices will continue
pushing higher, arguing that the so-called cyclical components
of inflation remained subdued. These are tied more closely to
the economy's performance and include new and used motor
vehicles, hotel room rates, airfare and apparel.
All either declined or were nearly unchanged in August.
"It is hard to imagine that rent will be rising at such a
rapid clip in the coming months. Taking all that into account,
the picture for the core rate suggests subdued readings ahead,"
said Omair Sharif, an economist at RBS in Stamford, Connecticut.