Inflation cools, but food, clothing costs rise

Overall, prices inch down as energy costs fall, a signal of more drops in months ahead

WASHINGTON -- Consumer prices in August posted their first monthly decline in nearly two years as Americans got some relief from surging energy prices. But the cost of food and clothing rose, and wages over the past year are down.

Consumer prices edged down 0.1 percent last month, the Labor Department reported Tuesday, a significant improvement from a 1.1 percent price increase in June and a 0.8 percent rise in July.

The cost of gasoline and other fuels plunged during the month, reflecting big drops in crude oil prices since they peaked at $147 per barrel in early July.

Analysts said the August decline should be followed by more price moderation in coming months if prices continue to fall. This will give the Federal Reserve room to cut interest rates, if needed, to combat the severe bout of market turmoil as Wall Street undergoes its biggest restructuring since the 1930s.

"Virtually all the inflation indicators are on the wane. Labor markets are weak, and compensation gains slight," said Kenneth Beauchemin, an economist at consulting firm Global Insight in Lexington, Mass.

The central bank met Tuesday but decided to leave interest rates unchanged, despite the dip in prices seen in the consumer inflation report. The Fed said in a statement that the risks of weak growth and higher inflation remained "of significant concern."

Even with the overall drop in prices because of the decline in energy, consumers were still being squeezed in a number of areas. Food prices posted a sharp 0.6 percent increase in August; so far this year, they are up at an annual rate of 7.5 percent, considerably faster than the 4.9 percent increase in food costs in 2007.

Clothing prices shot up 0.5 percent in August after an even bigger 1.2 percent rise in July, gains that economists said reflected the weaker dollar, which has boosted U.S. exports but increased the cost of imports such as clothing for U.S. consumers.

Democrats on the Senate Joint Economic Committee released a report Tuesday contending that families are spending twice as much on household expenses as they did in 2000. Meanwhile, median household incomes have been stagnant.

"Over the last seven years, families' pockets have been picked at the grocery store, the gas pump and each time they make their home energy, health care and mortgage payments," said Sen. Charles Schumer, D-N.Y.

The 0.1 percent drop in consumer prices in August was the first monthly decline since prices fell by 0.5 percent in October 2006, another time when energy prices declined dramatically.

Core inflation -- which excludes typically volatile energy and food prices -- was also well-behaved in August, edging up a slight 0.2 percent, after two months when core prices had risen 0.3 percent. Both the overall decline and the small increase in core inflation were in line with economists' expectations.

Over the past 12 months, overall inflation is up 5.4 percent. That's a slight improvement from the 5.6 percent rise for the 12 months ending in July, which had been the largest year-over-year increase in 17 years.