By Chris Cermak

WASHINGTON (MNI) – Inflation pressures are expected to have eased
in August, likely helped by lower energy costs, higher auto output, and
a weakening of the broader U.S. economy.

Both headline and core consumer prices are expected to climb 0.2%
when the figures are released Thursday, according to a survey of
economists by Market News International. Headline CPI rose 0.5% in July
and core added 0.2%.

An early indication of the August slowdown came from producer
prices released Wednesday. Headline PPI was unchanged after rising 0.2%
in July, while core PPI edged up 0.1%, down from a 0.4% gain in July.

Inflation concerns have been calmed somewhat in the last few months
after a rocky start to the year that was led by sharp gains in commodity
prices. Federal Reserve Chairman Ben Bernanke has said the price gains
are temporary, and even the hawkish Dallas Fed President Richard Fisher
on Monday said he mostly agrees.

Analysts say that could help ease the way for the FOMC to introduce
a new round of monetary easing — whether more Treasury purchases or
lengthening the average maturity of existing holdings — at its next
meeting September 20-21.

The rate of gains in headline CPI has been declining steadily since
March. The monthly gain over the last three months (May-July) averaged
0.17%, compared to 0.47% the three previous months (February-April). But
the 12-month rate currently still stood at 3.6% in July, and not all
economists agree that the rate will come down sharply any time soon.

“It’s not actually obvious we should be looking for price restraint
in this cycle,” Mike Englund, chief economist with Action Economics,
told MNI, arguing food and fuel prices could well remain high. “We
certainly don’t expect the (headline) to moderate and we don’t think the
central bank should be looking at anything but the total.”

Opponents of more accommodation argue that even if inflation trends
lower, the Fed has already done all it can to boost the economy. Fisher
on Monday said he expected inflation will gravitate towards 2% over the
coming months, but “the bar for (more accommodation) remains very high
for me until the fiscal authorities do their job, just as we have done
ours.”

Core CPI could also provide some worry to Fed officials and others
that inflation is trending slightly upward. A 0.2% gain in August core
CPI could push the 12-month rate from 1.8% in July to 1.9%, the highest
in 28 months and barely below the Fed’s unofficial target rate of 2% for
long-run inflation.

Yet some more dovish Fed officials have suggested an inflation rate
above 2% is acceptable for a time as the central bank and fiscal
policymakers work to combat high unemployment, the other half of the
Fed’s dual mandate.

Chicago Fed President Charles Evans has been leading the charge,
arguing last week that the 2% inflation target should be seen as an
average over time rather than a ceiling. Evans suggested an inflation
rate as high as 3% could be tolerated as long as unemployment, currently
at 9.1%, remains so far above its long-run trend.

For August, consumer price gains could be pushed down by higher
auto output following the supply shortages from Japan’s earthquake
earlier this year. Producer prices for passenger cars dropped 0.4% in
August, while light trucks prices pared their strong gains from July.
Auto sales also declined 0.3% on the month as inventories rose 0.4%,
according to Commerce Department figures Wednesday.

The energy index may also hold prices down, though seasonal factors
could partly mask the real fall in gasoline prices over the last month.
The PPI energy index fell 1% in August, while a 0.4% drop in import
prices over the month was led by a 2.1% decline in petroleum imports.

The CPI report will be released by the Labor Department at 8:30
a.m. ET Thursday.

— Chris Cermak is a Washington reporter for Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

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