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U.S. inflation muted in September as energy costs drop

Current gas prices are shown at a Shell gas station in Encinitas, California October 10, 2014. REUTERS/Mike Blake

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices rose marginally in September, painting a weak inflation picture that should give the Federal Reserve ample room to keep interest rates low for a while.

The Labor Department said on Wednesday its Consumer Price Index edged up 0.1 percent last month as a rise in food and shelter costs offset a decline in energy prices.

"The ongoing inflation weakness will give the Fed leeway to take a restrained approach to tightening monetary conditions," said Robert Hughes, senior research fellow at the American Institute for Economic Research in Great Barrington, Massachusetts.

The CPI had dropped 0.2 percent in August and economists had expected a flat reading in September. In the 12 months through September, the CPI rose 1.7 percent after a similar gain in August. The Fed targets 2 percent inflation and tracks an index that is running even lower than the CPI.

Inflation has waned in recent months after quickening in the second quarter, with a stronger dollar and slower economic growth in China and the euro zone dampening import prices. Sluggish wage growth has also helped keep a lid on prices.

The soft inflation backdrop and a recent global equities market sell-off has led investors to push back their expectations for when the U.S. central bank will raise interest rates from near zero to late next year. Just a few weeks ago, they had looked for a rate hike in July.

Fed officials meet next week and their statement at the end of the two-day meeting will be watched for changes in their assessment of the inflation environment.

Economists had expected consumer prices to hold steady last month, and U.S. Treasury debt prices slipped after the data was released, while the dollar rose against a basket of currencies. U.S. stocks were trading higher, boosted by strong earnings from Yahoo Inc (YHOO.O), Broadcom (BRCM.O) and Dow Chemical (DOW.N).


The report showed underlying inflation pressures were also muted, despite increases in shelter and medical care costs.

The so-called core CPI, which strips out food and energy prices, ticked up 0.1 percent last month, while the year-on-year change held steady at 1.7 percent.

Energy prices fell for a third straight month in September, with gasoline costs slipping 1.0 percent after dropping 4.1 percent in August.

While declining gasoline prices frees up income for other spending, tepid wage growth is blunting the impact. Average hourly earnings adjusted for inflation fell 0.2 percent in September and were up just 0.3 percent over the past year.

"It is hard to have strong economic growth when spending power is largely flat," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Food prices gained 0.3 percent in September and were up 3.0 percent from a year ago, the largest gain in nearly 2-1/2 years.

Within the core CPI, shelter costs increased 0.3 percent in September after rising 0.2 percent in August. The shelter index was up 3.0 percent in the 12 months through September, the largest increase since January 2008. Excluding shelter, the core CPI increased only 0.9 percent from a year ago.

The medical care index increased 0.2 percent, with prices for nonprescription drugs posting a record increase.

Airline fares declined for a third straight month, while prices for new motor vehicles and apparel were unchanged. Prices for used cars and trucks fell for the fifth straight month.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)