Consumer prices steady; Fed has room to cut rates

WASHINGTON -- Consumer prices were nearly flat in August as the costs of gasoline and other energy products tumbled. With inflation low, the Federal Reserve has leeway to cut interest rates further to deal with the economic fallout from the terrorists attacks, analysts said.

The Labor Department reported Tuesday that its Consumer Price Index, a closely watched inflation gauge, inched up 0.1 percent last month. In July, consumer prices fell 0.3 percent, the biggest drop in 15 years.

Even with the small uptick, analysts said inflation continued to be tame, a bit of good news as the Fed tries to keep the economy from tipping into a recession.

"With inflation remaining dormant, additional policy prescriptions needed to shore up the economy in the wake of last week's terrorist attacks have just been made easier," said Jerry Jasinowski, president of the National Association of Manufacturers.

Next cut could be Oct. 2

The Fed on Monday cut short-term interest rates for an eighth time this year, pushing borrowing costs down to their lowest point in nine years. As part of a global effort led by the Fed to calm anxious investors, central banks in Europe, Canada and Japan also eased credit. Economists believe the Fed is likely to cut rates again at its Oct. 2 meeting.

During the first eight months of this year, consumer prices rose at an annual rate of 2.5 percent, compared with an increase of 3.4 percent for all of 2000.

The "core" rate of inflation which excludes energy and food prices, rose for the second straight month by 0.2 percent.

The latest reading on consumer prices "suggests there is no inflationary threat whatsoever and thus they have room for further rate cuts as necessary to help stabilize capital markets and counter the economic weakness," said David Jones, chief economist at Aubrey G. Lanston & Co.

While economists are hopeful that prices will remain stable in the aftermath of the attacks on New York and Washington, some do worry about price spikes, especially for energy products. Others are concerned that aggressive action by the Fed to support the economy could sow the seeds of inflation down the road.