Underlying US inflation pressures were muted in August, keeping deflation fears alive, even though a rise in food and energy costs drove overall consumer prices higher.

The core consumer price index (CPI) was flat last month, the Labour Department said yesterday, defying financial market expectations of a 0.1 per cent gain. The core CPI, which excludes food and energy prices, rose 0.1 per cent in July.

While the report strengthened the Federal Reserve's bias towards further monetary easing, the data was not so weak that the US central bank is expected to announce new steps to ease monetary policy when it meets on Tuesday to assess the economy, analysts said.

"It keeps alive the possibility that the trend could turn negative over the next year or two, but the numbers are not weak enough to encourage them to start a new purchasing programme next week," Jim O'Sullivan, chief economist at MF Global in New York, was quoted as saying in our sister publication, the Gulf Daily News.

The overall CPI rose 0.3 per cent, lifted by higher food and energy costs, after a similar gain in July. August's rise was a touch above expectations of a 0.2 per cent increase. Another report showed consumer sentiment unexpectedly worsened in early September to its weakest level in more than a year.

The Thomson Reuters/University of Michigan's preliminary September reading on consumer sentiment came in at 66.6, down from 68.9 in August.

US government bond prices rose as some investors viewed the flat core reading as a sign deflation remained a threat to an economy struggling to recover from its worst recession since the 1930s.

With sluggish domestic demand expected to keep inflation pressures tame, many analysts believe the Fed will resume large-scale asset purchases in coming months to drive long-term interest rates lower to spur the economy and keep deflation risks at bay.

The US central bank already has cut overnight interest rates to near zero and pumped more than $1.7 trillion into the economy through purchases of Treasury and mortgage-related debt.

"We expect the Fed to formalise the bias toward easing, but they will probably wait until November to initiate balance sheet expansion," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Data on Thursday showed prices paid at the farm and factory gate increased 0.4 per cent in August.

In the 12 months to August, the CPI rose 1.1 per cent after a 1.2 per cent increase the prior month. The increase was in line with market expectations.

Last month energy prices rose 2.3 per cent after rising 2.6 per cent in July, while petrol prices were up 3.9 per cent. Food costs rebounded 0.2 per cent from July's 0.1 per cent drop.

The monthly core inflation rate was dampened by housing costs, which were flat, and weak prices for apparel.

However, new vehicle prices increased 0.3 per cent, the largest gain since November, after rising 0.1 per cent in July. – TradeArabia News Service