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 to go slow on boosting interest rates.
The core rate of the consumer price index, excluding food and energy, also rose 0.1 percent. Private economists had been predicting a 0.2 percent rise in both figures.
"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 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.
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.
Although the tame inflation news was generally welcomed as good news, some economists said it could be a sign 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.
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.
In other data Thursday, the Philadelphia Fed index of current activity fell to 13.4 in September from a reading of 28.5 in August. The index has remained positive for 16 consecutive months but is now at its lowest reading since July 2003.
The Philadelphia report "shows the activity in the manufacturing sector is not as strong as months past," said Wachovia Securities economist Gina Martin.
"Any reading above zero indicates activity is expansionary, but a level this low has not been seen since the manufacturing recovery really started to take hold last summer."