updated 9/17/2010 11:11:11 AM ET 2010-09-17T15:11:11

Consumer prices posted a small rise in August, but outside of a big jump in volatile gasoline prices, inflation was essentially flat.

Consumer prices edged up 0.3 percent in August, matching the July increase, the Labor Department said Friday. Core inflation, which excludes food and energy, showed no increase in August.

The 2007-2009 recession and the weak recovery since have banished inflation as an immediate threat. Sluggish demand is preventing most businesses from raising prices and high unemployment is keeping a lid on wage pressures.

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Over the past 12 months, core inflation is up just 0.9 percent, matching the lowest 12-month gain in 44 years. Overall prices are up a modest 1.1 percent during the past 12 months.

The absence of inflationary pressures has given the Federal Reserve room to keep interest rates at record lows for nearly two years in an effort to jump-start economic activity. Fed policymakers meet again on Tuesday and are expected to keep their target for the federal funds rate at zero to 0.25 percent, where it has been since December 2008.

The August and July increases followed three straight months of price declines. Those declines had raised concerns that the country could be facing a threat of deflation, something that has not been a problem in the United States since the Great Depression of the 1930s.

With overall prices rising again and the economy posting signs of emerging from its summer swoon, worries about deflation have decreased. But some economists say a mild bout of deflation is still a possibility if economic growth remains weak and unemployment stays high.

If that happens, "inflation will keep falling and eventually deflation, albeit probably a mild Japan-style one, will set in," said Paul Ashworth, senior U.S. economist for Capital Economics.

For August, energy prices rose 2.3 percent following a 2.6 percent July increase. Both gains had followed three straight months of energy price declines. In the past two months, gasoline prices have been increasing and were up 3.9 percent in August.

Food costs rose 0.2 percent in August after having fallen 0.1 percent in July. Last month, prices of meat, poultry, fish and eggs were down. The cost of fruits and vegetables increased.

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Outside of food and energy, clothing costs dropped 0.1 percent and airline fares were down 0.1 percent with the weak economy keeping inflation at bay in most areas.

Federal Reserve Chairman Ben Bernanke has said the Fed is prepared to take additional steps to boost growth if the economy deteriorates further. The Fed's most likely option would be to buy large amounts of government securities to drive down interest rates on mortgages and other types of consumer and business loans.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Inside August CPI


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