By Chris Cermak

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

Headline producer prices due Wednesday are forecast to be
unchanged, after rising 0.4% in July, while core PPI is expected to rise
0.2%, the same as in July, according to a survey of economists by Market
News International.

Both headline and core consumer prices are expected to climb 0.2%
when the figures are released Thursday, according to MNI’s survey.
Headline CPI rose 0.5% in July and core added 0.2%.

Inflation concerns have been calmed somewhat in the last few months
after a rocky start to the year, led by sharp gains in commodity prices.
Fed 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 Federal Reserve
to introduce a new round of monetary easing — whether more Treasury
purchases or lengthening the average maturity of existing purchases —
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 Market News International, 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.”

Yet core CPI could 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 even 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, price gains could be pushed down by higher auto output
following the supply shortages from Japan’s earthquake earlier this
year. The energy index may also hold prices down, though seasonal
factors could mask the real fall in gasoline prices over the last month.
Import prices dropped 0.4% in August, according to Labor Department data
Tuesday, as petroleum imports dropped 2.1%.

PPI will be released by the Labor Department at 8:30 a.m. Wednesday
and CPI at 8:30 a.m. Thursday.

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

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

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