US consumer prices ease and bolster rate cuts

16 October 2008 15:10  [Source: ICIS news]

WASHINGTON (ICIS news)--Prices paid by US consumers decreased slightly or held steady in September, the Labor Department said on Thursday, easing fears that inflationary pressures might compromise federal economic recovery efforts.

 

The department said its closely watched consumer price index (CPI) edged down by 0.1% in September and followed a 0.1% shave in August.

 

Market watchers had worried that an upturn in consumer prices could bring a halt to efforts by the US Federal Reserve to keep interest rates low in order to stimulate business borrowing, investment and hiring.

 

The Fed, the US central bank, tends to raise interest rates when inflation threatens to erode consumers’ purchasing power.

 

The central bank cut its key federal funds interest rate by 50 basis points on 9 October to 1.5% in hopes of stimulating business, and the Fed hinted broadly that it is ready to reduce its rates still further if needed to accelerate an economic recovery.

 

But that policy of "accommodation", as the Fed called it, would be threatened if consumer prices and inflation were seen to be increasing.

 

The department said that the narrow decline in the CPI in September was chiefly due to a 1.9% easing of energy prices last month, including a 0.8% reduction in motor fuel costs and a 3.4% drop in household energy prices.

 

Some of those declines in energy costs were partially offset by a 0.6% increase in food prices for the month.

 

The department also reported a 2.6% increase in consumer prices for the third quarter ended 30 September on a seasonally adjusted annual basis.

 

That rate of increase suggests an easing of pricing pressures for consumers compared with the increases of 3.1% in the first quarter and 7.9% in the second quarter this year.

 

The Fed’s rate-setting open markets committee is to meet in two weeks.

 

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By: Joe Kamalick
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