US consumer prices post first decline in nearly 18 months

The Labor Department said on Wednesday its Consumer Price Index dropped 0.2% last month as a broad decline in energy prices offset increases in food and shelter costs

US consumer prices fell for the first time in nearly 1-1/2 years in August and underlying inflation pressures were muted, potentially reducing the urgency for the Federal Reserve to raise interest rates.

The Labor Department said on Wednesday its Consumer Price Index dropped 0.2 percent last month as a broad decline in energy prices offset increases in food and shelter costs.

It was the first decline since April last year and followed a 0.1 percent gain in July.

Economists polled by Reuters had forecast consumer prices being flat in August. The CPI increased 1.7 percent in the 12 months through August, the smallest advance in five months, after rising 2.0 percent in July.

Inflation has cooled somewhat after an acceleration in the second quarter, which had fanned speculation of an early interest rate hike from the Fed.

Stripping out food and energy prices, the so-called core CPI was unchanged last month for the first time since October 2010 after nudging up 0.1 percent in July.

In the 12 months through August, the core CPI rose 1.7 percent, slowing down from July's 1.9 percent increase. It was also the smallest gain since March.

The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI.

The dollar fell against a basket of currencies on the data, while prices for U.S. government debt rose.

The CPI report was released ahead of the conclusion of the U.S. central bank's two-day policy meeting. The Fed is scheduled to release its policy statement at 2:00 p.m. (1800 GMT), which will be watched for signals on the timing of the first interest rate increase.

Many economists expect the U.S. central bank to tighten monetary policy in the second half of 2015. It has kept its benchmark overnight lending rate near zero since December 2008.

In August, energy prices fell for a second straight month and recorded their biggest decline since March 2013. There were broad declines in energy prices, with gasoline plunging 4.1 percent after declining 0.3 percent in July.

Food prices rose 0.2 percent after advancing 0.4 percent in July as the effects of a drought in California linger.

The core CPI was dampened by a second straight month of sharp declines in airline fares. Falling apparel and used car prices also weighed. Recreation prices recorded their largest drop since December 2009, while household furnishings declined.

Rents increased 0.2 percent last month after rising 0.3 percent in July. Prices for alcoholic beverages posted their largest increase since January 2007.