U.S. consumer prices muted, but rents and medical costs rise

U.S. consumer prices barely rose in August, but gains in rents and medical care costs pointed to a stabilization in underlying inflation that could allow the Federal Reserve to start trimming its bond purchases.

The Labor Department said on Tuesday its Consumer Price Index edged up 0.1 percent last month after rising 0.2 percent in July. In the 12 months through August, the increase in the CPI slowed to 1.5 percent after advancing 2.0 percent in July.

Economists had expected consumer prices to rise 0.2 percent last month and increase 1.6 percent from a year-ago.

Stripping out the volatile energy and food components, the so-called core CPI rose 0.1 percent after increasing by 0.2 percent in each of the past three months. Rents and medical care accounted for most of the increase in the core CPI.

That took the increase over the past 12 months to 1.8 percent, the largest rise since March. The core CPI had gained 1.7 percent in July.

The steady rise in the year-on-year core CPI could ease concerns among some Fed officials about a disinflationary trend becoming entrenched.

"We have seen the trough for the core rate during the summer. We expect we will see the core drift higher later this year," said Peter Newland, economist with Barclays Capital in New York. "The core inflation should move closer to their (the Fed's) target over the next several months."

Earlier in the year core inflation was moving lower, and reached levels that made some Fed officials uncomfortable. It has been creeping up for last two months from a two-year low of 1.6 percent touched in June.

The dollar pared gains against the yen on the inflation data, while U.S. Treasury debt prices rose marginally.

The inflation data was released as Fed policymakers prepared to meet on Tuesday and Wednesday to deliberate on monetary policy.

Economists generally expect the U.S. central bank to announce a scaling back of the $85 billion in bonds it has been buying a month to hold interest rates down at the end of the two-day meeting.

The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI. Fed Chairman Ben Bernanke has viewed the low inflation as temporary and expects prices to push higher as the economy strengthens.

Last month, overall inflation was held back by a 0.3 percent drop in energy as the cost of natural gas fell. Energy prices had increased 0.2 percent in July. Food prices nudged up 0.1 percent, rising by the same margin for a second straight month.

Away from food and energy, there were pockets of price pressures, with housing and medical care costs advancing.

Rent of shelter, which accounts for about a third of the core CPI, rose 0.3 percent. Owners' equivalent rent of primary residence posted its largest gain since November 2008.

Medical care costs rose 0.6 percent, with prescription drugs posting their largest increase since July 2007. Medical care, which makes up about 10 percent of the core, has been one of the key contributors to the low inflation early in the year.

(Reporting by Lucia Mutikani; Additonal reporting by Richard Leong in New York; Editing by Andrea Ricci)