Sept. 16 (Bloomberg) -- U.S. consumer prices fell in August for the first time in almost two years as fuel costs declined from record levels.

The consumer price index dropped 0.1 percent after jumping 0.8 percent the prior month, the Labor Department said today in Washington. So-called core prices, which exclude food and energy, rose 0.2 percent, as forecast, after a 0.3 percent gain.

The diminishing threat of inflation may offer scope for Federal Reserve policy makers to eventually lower interest rates to alleviate the collapse in credit that brought down Lehman Brothers Holdings Inc. Central bankers today left the benchmark rate unchanged at 2 percent and said the risk of accelerating prices and slower growth were both a ``significant'' concern.

The Fed ``shouldn't be worrying about inflation right now,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``Commodity costs are coming down, the economy is clearly weakening. It'll be less possible for consumer-goods companies to pass through commodity costs because their markets will be weaker.''

Treasuries slumped toward the close on speculation that American International Group Inc. may secure a loan package from the Federal Reserve. The yield on benchmark 10-year notes was 3.54 percent at 4:16 p.m. in New York, from 3.41 percent late yesterday. Stocks advanced.

Consumer prices matched the median forecast of 75 economists surveyed by Bloomberg News. Estimates ranged from minus 0.3 percent to gains of 0.4 percent.

Annual Change

Prices increased 5.4 percent in the 12 months to August, after a year-over-year gain of 5.6 percent in July that was the biggest since January 1991.

The core rate climbed 2.5 percent from August 2007, less than anticipated, after a 2.5 percent year-over-year increase the prior month.

Energy expenses dropped 3.1 percent, after a 4 percent gain in the prior month, led by the biggest slump in fuel oil since April 2003. Gasoline prices decreased 4.2 percent.

Oil prices have kept coming down this month. Crude oil futures on the New York Mercantile Exchange almost reached $90 a barrel today after averaging $116.69 in August.

The consumer price index is the government's broadest gauge of costs because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Food Costs

Food prices, which account for about a fifth of the CPI, increased 0.6 percent after a 0.9 percent gain in July.

New-vehicle prices dropped 0.6 percent, the most since November 2006, and hotel fares dropped 1.1 percent.

The price of airfares and clothing increased.

Rents, which make up almost 40 percent of the core CPI, rose at the same pace as in July. A category designed to track rental prices climbed 0.1 percent for a second month.

Today's figures also showed how lower prices helped American workers last month. Wages increased 0.6 percent after adjusting for inflation, following a decrease of 0.8 percent in July.

Still, price-adjusted earnings were down 2.5 percent over the last 12 months. The decline in purchasing power is one reason economists forecast consumer spending will slow in the second half of this year.

Companies are offering incentives as sales slump. J.C. Penney Co., along with American Eagle Outfitters Inc., sold discounted clothes in August amid what could be the worst back- to-school season in seven years for malls and department stores.

General Motors Corp. cut prices by giving all customers the same discounts offered to employees. The move boosted sales in the second half of August. GM this month said it will extend the incentive through Sept. 30 and has offered 72-month, no-interest financing on some vehicles since late June.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: September 16, 2008 16:22 EDT