September 17, 2004 -- Consumer prices rose only 0.1 percent in August, led by a decline in gas and car prices, according to a report released by the Labor Department on Thursday.

The slight increase followed a 0.1 percent decline in July, readings that should ease inflation concerns. Core prices -- or those excluding the volatile food and energy categories -- climbed by only 0.1 percent for the third straight month.

The report was even better than expected, as economists surveyed by Dow Jones Newswire and CNBC had forecast that overall prices and core prices would each rise by 0.2 percent in August.

Even with such tepid inflation, analysts anticipate the Federal Reserve to raise its target for short term interest rates by a quarter point to 1.75 percent when policymakers meet next week. In his testimony before Congress on September 8, Fed Chairman Alan Greenspan acknowledged that his inflation expectations have largely subsided, and said he believes the economy is on better footing, pointing to strengthening consumer spending and improved business investment.

Consumer prices for energy dipped 0.3 percent last month, as gasoline dropped 1.4 percent. Other fuel, electric and natural gas prices rose. Prices for new cars decreased by 0.3 percent. Airfare and clothing prices also fell.

Food prices grew 0.1 percent after a 0.3 percent jump in July. Housing prices increased by 0.2 percent, the same as July. Medical care and education costs saw gains as well.

Prices cooled on a year-to-date basis, growing at a seasonally adjusted 3.7 percent rate through August, down from a 4.1 percent pace through July. However, price increases have been far more prevalent in 2004 compared to 2003, when prices rose 1.9 percent during the entire year.