WASHINGTON -- Inflation slowed last month as Americans finally got a break at the gas pump, lifting consumers' spirits and easing fears the country could stumble into recession.
The Labor Department reported yesterday that consumer prices rose just 0.2 percent in August, half the gain in July. With oil prices falling in September, economists predicted more good news ahead on inflation.
That should bolster consumer spending and make a recession much less likely.
The recent drop in gasoline prices -- which had surged above $3 per gallon in early August but is now down to $2.62 nationwide -- is helping to lift consumer confidence.
The RBC Cash index, from the Ipsos international polling firm, showed confidence soared to a seven-month high of 93.7 in early September after a sharp fall in August.
A separate consumer survey by the University of Michigan also showed confidence rising.
Analysts said the readings offered hope for a rebound in consumer spending, which slowed dramatically in the spring.
Consumers account for two-thirds of total economic activity. They have been under pressure from soaring energy prices, rising interest rates, and a weakening housing market.
With inflationary pressures easing, analysts said Federal Reserve policy makers are likely to keep interest rates unchanged -- at their next meeting, Wednesday, and for the rest of 2006.
The belief is that the Fed's 17 increases over the past two years have slowed economic growth enough to restrain inflation.
Not all the economic news yesterday was positive.
The Fed reported that output at factories, mines, and utilities dropped by 0.1 percent in August, the first setback in seven months.
Several factors contributed, including a drop in utility production that reflected the end of a summer heat wave and a fall in oil production related to the troubles with the Prudhoe Bay pipeline in Alaska.