U.S. consumer prices post first decline in seven months

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices unexpectedly fell in August as gasoline prices resumed their decline and a strong dollar curbed the cost of other goods, pointing to tame inflation that complicates the Federal Reserve's decision whether to hike interest rates.

The Labor Department said on Wednesday its Consumer Price Index slipped 0.1 percent last month, the first decline since January, after edging up 0.1 percent in July.

In the 12 months through August, the CPI rose 0.2 percent after a similar gain in July.

Signs of a disinflationary trend reasserting itself are in stark contrast with a rapidly tightening labor market and highlight the dilemma Fed officials face as they contemplate raising interest rates for the first time in nearly a decade.

The U.S. central bank's policy-setting committee was due to start a two-day meeting later on Wednesday. While solid data on consumer spending, housing and employment have been supportive of a rate hike, the case for higher borrowing costs has been undermined by recent global financial markets turmoil.

"You can make a strong case either way for the Fed to begin raising interest rates or waiting," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"The prudent risk management approach would argue for them to hold off, but if the Fed was really data dependent there is a very a strong case to raise rates on Thursday," he said.

The dollar pared gains versus the euro and the yen after the data. U.S. stock index futures were little changed.

U.S. financial markets were pricing a 29 percent probability of a lift-off in the Fed's benchmark overnight interest rate on Thursday, little changed from before the data's release.

Tightening labor market conditions, marked by record high job openings and a 5.1 percent unemployment rate, have so far not spurred faster wage growth. Sluggish wage gains and a strong dollar have contributed to keeping inflation below the Fed's 2 percent target.

Economists polled by Reuters had forecast the CPI unchanged in August and rising 0.2 percent from a year ago.

The so-called core CPI, which strips out food and energy

costs, ticked up 0.1 percent last month after a similar rise in July. The muted gains in the core CPI reflect the dollar's impact on the cost of imported goods.

In the 12 months through August, the core CPI increased 1.8 percent. It was the fifth time in six months that the 12-month change was 1.8 percent. The Fed tracks the personal consumption expenditures price index, excluding food and energy, which is running well below the core CPI.

Last month, gasoline prices fell 4.1 percent, the biggest drop since January, after rising 0.9 percent in July. Food prices gained 0.2 percent as egg prices increased 7.7 percent.

Egg prices are now up 35.3 percent from a year ago, reflecting the impact of the avian flu that struck some parts of the country early in the year. The rental index increased 0.3 percent last month, matching a similar gain in July.

There were also increases in tobacco prices and apparel. However, airline fares fell 3.1 percent and used car prices declined for a fourth straight month. Household furnishings also fell as did the cost of recreation.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)