WASHINGTON (AP) – U.S. consumer prices edged down in August, marking the first decline in seven months and fueled by a big drop in gasoline prices.
The Labor Department said Wednesday its consumer price index slipped 0.1 percent in August after a small 0.1 percent rise in July. Gas prices, which had been rising for three months, dropped 4.1 percent amid the recent fall in global oil prices.
The report comes as the Federal Reserve begins two days of meetings to decide whether it will raise interest rates for the first time in nine years. It watches consumer prices closely, and the latest figures may add fuel to arguments that inflation isn’t strong enough yet.
After nine years of reducing interest rates, could the Fed actually start to raise rates?
“Well that’s the million dollar question. It’s fifty-fifty at this point,” says investment strategist Carrie Coghill.
Coghill says if forced to pick, she thinks the Fed will not raise rates this week
Financial advisor Rick Applegate agrees.
“We don’t think it’s going to happen though, but we do think that the Federal Reserve governors who serve on the Open Market Committee are clearly evenly divided as to that decision. It still could go up. We’ll see,” Applegate told KDKA money editor Jon Delano on Wednesday.
Why should anyone care if the Federal Reserve raises interest rates?
First, the stock market will react to whatever the Fed does.
Second, higher interest rates from the Fed means higher interest rates for consumers through higher mortgage rates, through consumer loans, car loans.
“It will certainly have a more immediate impact on things like credit cards,” says Applegate. “Short term borrowing like home equity lines of credit could go up. So if you’ve got outstanding debt you’re going to want to think to pay it down because it’s going to cost you a little bit more to service that debt when rates go up.”
But Applegate says the Fed is unlikely to raise interest rates very dramatically — maybe a quarter of a percent at a time.
And a rate increase is not all bad news, especially if you have money in a savings account, a money market, or a certificate of deposit.
“They really have been suffering, so a little bit of an increase in interest rates might help them with their money markets and their deposits in the bank. We’ll see those go up a little bit, too.”
Economists said Fed policymakers were caught between evidence of a strengthening economy and persistently low inflation.
“Despite many signs of stronger growth – jobs, retail sales, auto sales, home sales – there is very mild inflation pressure,” said Jennifer Lee, senior economist at BMO Capital Markets. “This is a tough call for the Fed.”
Steve Murphy, an economist at Capital Economics, said the August report did not change his view that the forces dragging inflation lower are only temporary.
“The deflationary pressure from low energy prices and a strong dollar will begin to fade next year,” he said. “Together with the fact that the economy is already very close to full employment, this suggests that both wages and core inflation will surprise on the upside next year.”
Food prices were up 0.2 percent last month, led by another surge in egg prices.
Core inflation, which excludes volatile energy and food costs, rose a modest 0.1 percent in August, indicating cost pressures remain a no-show in the economy. Over the past 12 months, overall prices are up just 0.2 percent, while core inflation is up a modest 1.8 percent.
A key inflation gauge that the Fed monitors is up just 1.2 percent excluding food and energy over the 12 months ending in July, marking more than three years that inflation in this index has been running below the Fed’s 2 percent target for inflation.
Economists were evenly split on a Fed move. Many believe the central bank will start pushing rates higher given that unemployment has dropped to a seven-year low of 5.1 percent, within the Fed’s target range for full employment.
But other analysts argue that the Fed will wait to see how much impact recent events such as a slowdown in China and financial market turbulence will have on the U.S. economy.
These analysts argue that with inflation so far below the Fed’s target and moving lower due to a strong dollar and falling oil prices, it is in no hurry to raise rates.
The 0.1 percent drop in prices in August marked the first decrease since a 0.7 percent decline in January, a period when prices fell for three straight months as energy costs moved sharply lower.
Gas costs are now 34.6 percent below where they were a year ago. After rising for a few months, they have been headed lower again. The national average for a gallon of gas is $2.32, 35 cents lower than a month ago.
Egg prices, which have been pushed higher by an avian flu outbreak among chickens, rose 7.7 percent in August and are now up 35.3 percent over a year ago. The cost of fresh fruits and vegetables posted their biggest gains this year.
Airline fares, which had fallen by 5.6 percent in July, were down another 3.1 percent in August.
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