Inflation eases to 5.4% as consumer prices fall 0.1%

Inflation eased to 5.4% in the past year, as consumer prices declined 0.1% in August and marked the first decline in nearly two years, according to a Labor Department report released Tuesday.

With inflation’s decline, some economists said the path was paved for a potential interest rate cut after the Federal Reserve’s monthly meeting on Tuesday.

“This frees the Fed’s hands to cut rates, if they deem that to be the right move later today,” said Mark Vitner, senior economist at Wachovia.

“If inflation continued to accelerate, it would make it very difficult for the Fed to cut interest rates,” said Vitner. “But now, if they need to cut interest rates, they will do it.”

As near as a week ago, most analysts had expected the Fed to keep interest rates unchanged. However, financial turmoil and inflation expectations turned many toward the prospect of a cut by at least 25-basis points. As it turns out, the Fed kept interest rates steady at 2.0%.

Consumer price numbers…

The latest 5.4% inflation rate marks a new direction. July’s twelve month inflation rate was at 5.6%, when consumer prices increased by 0.8% followed by a 1.1% rise in June.

Inflation’s reduction was helped by falling energy prices, which dropped by 3.1 percent in August after three consecutive sharp increases. Gasoline prices declined by 4.2% , although its 35.6% higher than in August 2007. The index for household energy, which was up 3.8 percent in July, declined 1.6 percent in August. Fuel oil fell priced plunged 9.6%, the most in five years.

The core Consumer Price Index (CPI), which excludes volatile food and energy costs, increased by 0.2%. It was inline with economic expectations and compared to a 0.3% rise in July. The core rate is now up 2.5% in the past year, which is still beyond the Federal Reserve’s desired comfort zone.

Food and beverage prices increased 0.6% following a 0.9 percent increase in July. Fruit and vegetable prices climbed 2.1% and meat prices were up 1% for the second consecutive month. On the flip side, cereal and bakery prices fell 0.1%.

Hotel and motel fares declined 1.1%. Medical-care prices increased by 0.2%. New-car prices dropped 0.6%, with used-car prices falling 0.3%.

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