WASHINGTON (AP) - Consumer prices edged up a moderate 0.2 percent last month despite the fact that gasoline prices soared by the biggest amount since the Persian Gulf crisis in 1990. Meanwhile, output at the nation's factories rebounded sharply.
The Labor Department reported that the August increase in its Consumer Price Index matched a similar 0.2 percent rise in July as the biggest drop in clothing costs in eight years helped to offset the higher energy prices.
In a separate report, the Federal Reserve said that industrial production shot up 0.7 percent in August as output in manufacturing rose by the biggest amount in 16 months.
The increase in production meant that America's factories, mines and utilities were operating at 83.9 percent of capacity in August, the highest operating rate in two years.
The combination of low inflation and solid growth proved a tonic for both bond and stock markets. The Dow Jones industrial average rose 92 points to 7,814 at midafternoon.
Analysts said the U.S. economy continues to enjoy near-perfect conditions even though the expansion, now in its seventh year, has long passed the point where tight labor markets normally begin triggering rising price pressures.
"It has been a remarkable stretch," said Oscar Gonzalez of John Hancock in Boston. "Economic historians may be able to explain this period some day, but right now we can only guess and enjoy the ride."
For the first eight months of this year, inflation at the consumer level has been rising at an annual rate of just 1.6 percent, less than half the 3.3 percent increase turned in during 1996.
This exceptional performance on inflation has been the primary reason that the Federal Reserve has held off increasing interest rates even though strong economic growth has pushed unemployment below 5 percent for five straight months, levels not seen in 24 years.
While tight labor markets would raise concerns that inflation was about to accelerate, that has yet to occur. Most economists believe the Fed will pass up the chance to raise rates when they next meet on Sept. 30, but some feel a rate increase will occur in either November or December if economic growth remains as strong as it has been recently.
In another report today, the Commerce Department said that business inventories were up a moderate 0.2 percent in July, a marked slowdown from a 0.7 percent in June that had raised concerns that unwanted stockpiles might trigger cutbacks in production.
For August, energy prices, which had fallen four of the past five months, rose 1.7 percent, the biggest monthly advance since a 3 percent rise in April 1996. Gasoline pump prices were up 5.4 percent, the biggest one-month increase since a 7 percent spike in October 1990 following Iraq's invasion of Kuwait.
Food prices increased 0.4 percent in August, compared to a 0.3 percent gain in July. The slight acceleration reflected higher prices for fresh fruits and vegetables. The 2.8 percent rise in fruit prices was the biggest monthly gain in a year.
While rising energy prices would normally be a cause for concern, analysts said the August spurt was likely to be temporary.
Excluding the volatile energy and food categories, prices were up just 0.1 percent in the so-called core rate of inflation, even better than a 0.2 percent rise in July.
Through August, the core rate of inflation has been rising at an annual rate of 2.2 percent, even better than last year's 2.6 percent rise.
The good performance in the underlying inflation rate in August reflected a 1 percent plunge in clothing costs, the biggest one-month drop since August 1989. Analysts said the decrease reflected slower-than-normal introduction of fall clothing lines.
New vehicle prices were also down in August, dropping 0.1 percent. Used car prices were down an even larger 0.8 percent.
Airline fares which had been up 2.3 percent in July declined 4.7 percent in August.