WASHINGTON (AFP) - New data showed US inflation in check, with consumer prices up a modest 0.1 percent in August, giving the Federal Reserve room go slow on boosting interest rates.
The core rate of the consumer price index (CPI), excluding food and energy, also rose 0.1 percent, official figures showed Thursday.
Private economists had been predicting a 0.2 percent rise in both figures.
The CPI, the most widely used gauge of inflation at the consumer level, has risen 0.1 percent in each of the past three months.
Last week, the government said US producer prices dipped 0.1 percent in August, with the core producer price index -- excluding food and energy goods -- also down 0.1 percent.
Over the first eight months of the year, consumer prices were up 3.7 percent, but just 2.2 percent when the volatile food and energy components are removed.
Over the past 12 months, the CPI index is up 2.7 percent, with the core inflation rate at 1.7 percent.
"This is good news ... I think the market will treat these as favorable readings and the inflation scare seems to be fading," said Dick Rippe, economist at Wachovia Securities.
"The underlying data shows little reason to worry about a re-acceleration of prices in the near future," said the economic team at Lehman Brothers in a note to clients.
The report also offers some vindication for Federal Reserve chairman Alan Greenspan and his colleagues, who have been arguing that price increases earlier this year were transitory.
"Higher oil and raw materials prices are not being passed through to other goods and services at a significant rate, allowing the Fed to continue its course of measured interest rate increases," said Sung Won Sohn at Wells Fargo Bank.
The central bank, which is aiming to bring interest rates back to a more normal level after a period of unusually low rates to stimulate a sluggish economy, is expected to boost its key rate by a quarter-point on September 21.
The latest report showed energy costs fell 0.3 percent in August after dropping 1.9 percent in July.
Within the energy sector, gasoline prices fell 1.4 percent. Fuel oil costs rose 5.2 percent, the smallest increase since January.
Food prices rose 0.1 percent in August after rising 0.3 percent in the previous month.
Although the tame inflation news was generally welcomed as good news, some economists said it could be a hint of economic weakness that might be worrisome if the trend continues.
"With weak pricing power (due to high competition) and the deceleration in demand, US businesses have some difficulties to pass the rise in their input prices into their final prices," said Marie-Pierre Ripert, US economist for CDC IXIS.
"As a result, to maintain their profit rate, they adjust employment and wages."
Leslie Preston at CIBC World Markets also noted that core inflation below a two percent annualized pace is a sign of weakness, and that the Federal Reserve may pause after boosting rates next week.
"Widespread discounting in a number of sectors also reinforces our view that the economy may not be emerging from its soft patch as quickly and strongly as Greenspan and some observers have recently been suggesting," Preston said.
"Greenspan has not deviated from his story that the current soft patch is temporary, and a 25 basis-point hike next week is likely a done deal. But, as the squeeze on retailers spreads through the economy the Fed will eventually be forced to take a long pause on its rate hike agenda."