Sept. 16 (Bloomberg) -- U.S. consumer prices barely rose in August, restrained by cheaper automobiles and apparel, suggesting Federal Reserve policy makers can be deliberate in raising interest rates, a government report showed.

The 0.1 percent increase in the consumer price index compares with a 0.1 percent decline in July, the Labor Department said in Washington. The core rate, which excludes food and energy, rose 0.1 percent, less than forecast, for a third straight month.

The figures suggest higher costs for crude oil and raw materials aren't being passed through to other goods and services. Federal Reserve Chairman Alan Greenspan said in congressional testimony last week that inflation expectations have eased, suggesting the Fed will raise its benchmark interest rate at what it calls a ``measured'' pace.

``After a scare in the spring, inflation data have validated the Fed's relaxed view toward prices this year,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut.

Economists expected the total index to rise 0.1 percent, according to the median of 71 forecasts in a Bloomberg News survey. The core index was forecast to increase 0.2 percent, according to the survey median.

The Treasury's 4 1/4 percent note maturing in August 2014 rose 1/16, pushing down the yield 1 basis point to 4.16 percent, at 8:32 a.m. in New York.

Jobless Claims

A separate report showed initial jobless claims rose less than forecast. First-time applications increased by 16,000 to 333,000 last week, the Labor Department said.

The consumer price index was up 2.7 percent from August of last year after a 3 percent rise in July. Excluding food and energy, it rose 1.7 percent from August 2003 compared with a 1.8 percent year-over-year rise in July.

So far this year, consumer prices are rising at a 3.7 percent annual rate, compared with a 2.4 percent increase at the same time a year ago. Core prices are rising at a 2.2 percent rate, up from 1.3 percent in the first eight months of 2003.

The average weekly earnings of U.S. workers after adjusting for inflation rose 0.3 percent in August after rising 1 percent the month before, the department said.

Greenspan

Greenspan said in prepared testimony to the House Budget Committee on Sept. 8 that ``inflation and inflation expectations have eased in recent months.''

``Despite expectations being lower for both growth and inflation, the Fed shows no sign of deviating from its plan to raise interest rates slowly but steadily,'' said Douglas Lee, president of Economics From Washington, a research firm in Potomac, Maryland.

The Fed is forecast to raise the benchmark overnight bank, lending rate by a quarter-point on Tuesday to 1.75 percent, the third increase since June, based on a Bloomberg survey of economists.

Prices for new automobiles fell 0.3 percent after falling 0.7 percent the month before. Clothing prices dropped 0.2 percent. The costs personal computers and equipment fell 1.3 percent for a fourth month.

Incentives

Automakers increased the amount they spent on incentives last month to $4,203 from $4,027 in July, according to estimates from CNW Market Research, which tracks auto incentives. Incentives rose 5 percent from July at General Motors Corp., to $4,869.

General Motors Chief Executive Rick Wagoner told reporters in Grass Lake, Michigan, Tuesday that automakers are holding down prices by cutting costs. He also said he expects U.S. auto- industry sales to rise about 2 percent to 3 percent this year and next, helped by the nation's economic growth.

Energy prices, which account for about a 14th of the index, declined 0.3 percent in August after a 1.9 percent decline the month before. They were up 10.5 percent from a year earlier. Gasoline prices dropped 1.4 percent in August after a 4.2 percent fall.

Gasoline

Gasoline prices averaged $1.92 a gallon in August, down slightly from an average of $1.95 a gallon the prior month and as high as $2.10 in May, according to U.S. Department of Energy figures. Crude oil futures on the New York Mercantile Exchange prices reached a record high last month amid concern about supply disruptions.

Food prices, which account for about a fifth of the index, rose 0.1 percent after rising 0.3 percent in July. Dairy prices declined 1.8 percent after falling 0.6 percent. Compared with a year earlier, dairy prices were up 10.4 percent.

Prices for services, such as medical care, household operations and transportation, rose 0.1 percent after rising 0.3 percent. Services account for about 60 percent of the index, the government's broadest measure of inflation.

The cost of medical care rose 0.2 percent in August. Compared with a year earlier, medical care was up 4.4 percent.

Housing costs, which include some energy costs and account for one-third of the index, rose 0.2 percent for a second month.

Airfares

Airfares declined 3.7 percent, the biggest drop since June 1999, after rising 0.5 percent in July. Concerns over terrorism have made it difficult for airlines and hotels to pass on prices increases, said Joseph Abate, a senior economist at Lehman Brothers Inc. in New York.

A government report Friday showed that U.S. producer prices unexpectedly declined last month, reflecting cheaper cars, computers and gasoline.

Some companies are betting customers will be willing to pay more as the labor market improves. Anheuser-Busch Cos., the world's largest brewer, plans to raise beer prices in the fourth quarter.

Federated Department Stores Inc. Chief Executive Terry Lundgren said he is ``optimistic'' about the fourth-quarter holiday season as shoppers buy dressier clothes and higher-price merchandise.

Retail Sales

U.S. retail sales excluding vehicles rose for a fourth month in August, a government report Tuesday showed, evidence that consumer spending may rebound as the labor market improves after spending grew at the weakest pace in three years during the second quarter.

U.S. employers added 144,000 workers last month, the most since May and the first time in five months that the pace job growth accelerated.

The economy was cited as the key issue in this year's campaign as President George W. Bush seeks re-election amid a challenge from Democratic Massachusetts Senator John Kerry, according to a Washington Post and ABC News survey of adults taken last week.

Rising crude oil costs have led some economists to cut forecasts for economic growth. The economy will grow at a 3.7 percent annual rate from July through September, slower than the 3.9 percent estimated last month, according to the median of 61 forecasts in a Bloomberg survey conducted Aug. 30 to Sept. 8. Economists have cut a half percentage point from third-quarter forecasts over the past two months.

DuPont Co., the second-largest U.S. chemical maker, said growth in the global markets where it competes will rise less next year as the economy slows and raw-material costs increase. Chief Executive Charles O. Holliday said in an interview that the Wilmington, Delaware-based company is ``putting in place processes to do better in a slower economy,''

To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net

Last Updated: September 16, 2004 08:52 EDT