Inflation watchers breathe a sigh of relief after government reports 0.3% rise in CPI.

WASHINGTON -- Inflation worries eased, at least temporarily, yesterday after the government issued a moderate consumer price report for August that was in line with market expectations.

The Labor Department said its consumer price index rose 0.3% for the third month in a row, resulting in a 2.9% increase in prices compared to a year earlier. Excluding food and energy, the core rate of inflation that is watched closely by Federal Reserve officials also was up 0.3% and 2.9% from August of last year.

The bond market found the report reassuring after last Friday's 0.6% jump in the producer price index for August showed that prices of wholesale goods were starting to creep up. The CPI is a broader measure of inflation that tracks retail prices of goods and services bought by consumers.

Analysts said the latest figures seemed to indicate that while the inflation genie has not been put back in the bottle, he may not turn out to be as destructive as feared. "So far, inflation is still a problem for tomorrow rather than for today," said Robert Dederick, chief economist for Northern Trust Co. in Chicago.

At the same time, expectations remain widespread that Fed policymakers will act again to tighten credit when they meet in November. That is because the economy, while it appears to be slowing from the hot 4% pace of the last nine months or so, still seems to be strong enough to generate some upturn in inflation.

"The numbers that we got generally fit with the idea that consumer price inflation, at least this year, will be slightly in excess of 3%," said Marilyn Schaja, money market economist for Donaldson, Lufkin & Jenrette Securities Corp. "We're seeing a slight increase in inflation pressures, but nothing to be really alarmed about."

Schaja added, "We're definitely not seeing the follow-through from commodity prices into consumer prices."

Since the Fed boosted short-term rates in August, analysts have been expecting officials to refrain from raising short-term rates again until the Nov. 15 meeting of the Federal Open Market Committee. After the PPI report came out last Friday, some analysts started to suggest the Fed might have to act sooner.

The CPI report swung expectations back firmly toward a delay in tightening until after the elections in November, when officials will have the September and October employment reports as well as more price figures.

Analysts said the 0.3% rise in consumer prices in August was not anything to brag about. On an annualized basis, it translates into an increase of 3.6%, although the final figure for 1994 will probably be lower than that, said Schaja.

Some of the increase in last month's prices was the result of special factors, such as the frost in Brazil that boosted coffee prices for the third straight month. Coffee prices jumped 22%, accounting for most of the rise in grocery store prices. Higher gasoline prices from the rebound in oil prices helped push up transportation costs 1% for the second time in a row.

Other parts of the report seemed encouraging to analysts. Clothing costs fell for the second month in a row as retailers marked down summer wear and put in place smaller-than-usual price increases on new winter lines of clothing for the fall and winter. Medical care costs rose 0.4% for the third straight month, and new car prices were up only 0.2%.

Fed vice chairman Alan Blinder said last week that the economy is slowing toward the 2.5% rate that officials are believed to be targeting to contain inflation. But Fed governor Lawrence Lindsey said the economy "is on a solid growth path," suggesting he is less confident that the economy is cooling off.

Many economists say that while a reduced pace of inventory-building by businesses is likely to dampen growth in the third quarter to between 2% and 2.5%, the economy is likely to pick up again in the last three months of the year. That in turn reinforces the case for another Fed tightening of rates in November.

"We had a tolerable reading in the CPI in August, but I still think we're getting other good indications that the economy is performing well, and I think Fed officials will continue to view inflation as having high-side risks," said Michael Moran, chief economist for Daiwa Securities Inc.

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