Flat Times For Consumer Prices

Consumer prices rose .45% in August, driven primarily by the 4.6% jump in energy costs, while food prices also eked out a .1% gain after falling through the year. Excluding those relatively volatile elements, inflation barely rose, managing to squeeze out a gain of .07%, the weakest reading of the year.
The razor-thin increase was all the more impressive as the Fed reported that industrial output, which includes U.S. factories, mines and utilities, rose .8% in August, topping the Street's expectations, and providing further indication that the nation is in the midst of a nascent recovery.

Investors were happy with the news, as the stocks saw strong gains by midday trading. (See "Stocks Rise On Health Care Plan, Industrials.") The basic materials sector enjoyed some of the strongest support, as companies like United States Steel ( X - news - people ) gained 3.1%, and Alcoa ( AA - news - people ) rose 3.4%. Meanwhile, conglomerate General Electric ( GE - news - people ) jumped 6.1% and utilities firm Exelon ( EXC - news - people ) increased 2.7%.
The indication that consumer inflation remains weak underscores what the central bank officials have been saying for some time. (See "Dour Fed Chatter." and "Fear Inflation Later.") Many on Wall Street have warned that the government's immense stimulus measures will eventually lead to inflation, if only because the amount of debt incurred will weaken the dollar. (See "Raise Interest Rates,""Betting Against The Fed" and "Dollar Falls Against Other Currencies.")
Fed officials have countered these claims by insisting that the economic recovery will be too slow to spark a rise in prices. Fed chairman Ben Bernanke told an audience in Washington on Tuesday that the economy will stay weak for some time. (See "What Bernanke Really Said.") San Francisco Fed President Janet Yellen insists there is no real inflation threat, and that the greater risk is it remaining too low.
Mike Feroli, senior economist at JPMorgan Chase, credited the slim price increase in August to the cash-for-clunkers program, which contributed to a 1.3% drop in new vehicle prices, the largest of its kind in nearly 40 years. "We had anticipated an even bigger drop, though apparently auto dealers offset the incentive to an ever greater degree than we had penciled in," Feroli said.
He noted that used vehicle prices spiked 1.9%, which was the second largest increase in over a decade. What makes the spike so interesting, Feroli said, is that the cash-for-clunkers program should not have affected used vehicle demand, but it should have affected supply. "To some degree, the cash-for-clunker effect on both new and used vehicles should unwind next month," Feroli said. "Excluding vehicles, the core CPI increased .11%."