Thu Sep 16, 2004
By Tim Ahmann

WASHINGTON (Reuters) - U.S. consumer prices rose a slight 0.1 percent in August while activity at mid-Atlantic factories slumped this month, according to reports on Thursday seen boosting chances of a pause later this year in the Federal Reserve's drive to raise interest rates.

While the factory data suggested the economy had yet to pull out of a summer soft patch, analysts said the U.S. central bank appeared certain to raise rates at a meeting next week.

Like the overall consumer price index, the core index that strips out volatile food and energy prices also moved up just 0.1 percent last month, the Labor Department said.

Economists had looked for a 0.1 percent gain in the overall CPI, the most widely used gauge of U.S. inflation, but expected the core index to rise 0.2 percent.

A pickup in core inflation earlier this year had sparked concern that long-dormant inflation was stirring. But the core index, closely eyed by Fed officials, has risen just 0.1 percent in each of the last three months.

"Inflation worries from earlier this year have fully receded," said Stephen Gallagher, chief U.S. economist at SG Corporate & Investment Banking.

In the mid-Atlantic factory report, the Federal Reserve Bank of Philadelphia said its business activity index dropped to 13.4 in September from 28.5 in August, at odds with market expectations for only a mild decline, if not a gain.

Prices for U.S. bonds leapt higher, pushing yields to five-month lows, the dollar fell and stocks closed up marginally as investors bet the Fed would move less aggressively on interest rates than thought earlier.

MORE MEASURED?

Still, Fed officials are widely expected to raise overnight interest rates a quarter percentage point to 1.75 percent when they meet on Tuesday, the third such "measured" step in the central bank's tightening cycle.

Policy-makers have made it clear they believe rates are too low for what appears to be a self-sustaining expansion.

But analysts think the Fed may soon take a breather from the rate-hike campaign started in June as long as inflation is in check, unless signs emerge of a big economic surge.
Economists said the Philadelphia Fed's report, which they look at to guess the health of the entire U.S. manufacturing sector, was a mixed bag. While the overall index fell, gauges on new orders and employment rose.

"The results are inconclusive, and the fog regarding exactly where the economy is headed persists," economist Steve Stanley of RBS Greenwich Capital Markets wrote clients.

Energy prices, which rose sharply earlier in the year and weighed on growth, fell 0.3 percent in August on the heels of a plunge in July. The cost of gasoline tumbled 1.4 percent with supplies ample as the summer driving season wound down.

The drop in gasoline offset a hefty rise in the price of fuel oil and increases for electricity and natural gas. Food costs moved up just 0.1 percent, the smallest increase since January, when prices were unchanged.

New vehicle prices slid 0.3 percent, and both apparel and recreation costs fell 0.2 percent. In contrast, housing and medical care costs both gained 0.2 percent.

JOBLESS CLAIMS UP

A third report showed the number of Americans lining up for an initial week of state unemployment aid rose 16,000 to 333,000 last week, a level economists said suggested companies continued to expand payrolls moderately. Wall Street had looked for claims to rise more sharply to 340,000.

For the first time in weeks, the Labor Department said its claims data appeared unaffected by hurricanes.

The latest increase partially reversed a sharp drop at the start of the month that had been pinned in part on Hurricane Charley, which struck Florida in mid-August. Hurricane Frances hit the state during the Labor Day holiday weekend early this month, but its impact has yet to be seen.

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