Sep 13, 2012 08:44 AM EDT

Spike In Gas Prices Due To Inflation; Consumers May Have To Cutback On Spending

 Inflation likely picked up in August on higher gasoline prices, although a gauge of underlying inflation was probably muted enough to keep the U.S. Federal Reserve leaning toward looser monetary policy.

The government's Consumer Price Index likely climbed 0.5 percent last month after being flat in July, according to the median forecast in a Reuters poll of 76 analysts. Prices are seen rising 1.7 percent in the 12 months through August.

The Labor Department releases its inflation report on Friday at 8:30 a.m.

Core prices, which strip out food and energy, likely increased a smaller 0.2 percent in August, and were seen up 2 percent from August 2011.

That last number is closely watched by policymakers at the U.S. central bank, who are expected to ease monetary policy on Thursday to help the flagging economy.

Even if Fed policymakers don't announce a bond buying program on Thursday after a two-day meeting, a tame increase in core inflation will likely help give them room for more easing later in the year.

"As long as core is close to 2 percent it is basically neutral for the Fed," said Ryan Wang, an economist at HSBC in New York.

The increase in overall prices, however, could whack consumers already trapped in a sour jobs market, which has muted wage increases. The jobless rate has been stuck above 8 percent since February 2009.

Gasoline prices rose 8 percent in August, according to the U.S. Energy Information Administration. The increase has been driven by efforts by the United States and its allies to use sanctions to keep Iran from exporting oil.

The sanctions are aimed at forcing Iran to curb the nuclear activities the West believes are aimed at developing an atomic weapons capability, an allegation Tehran denies. Iran says its nuclear work is for peaceful energy purposes.

Expensive oil likely means households will have less money to spend on other things. And because much of the oil consumed in the United States is imported, it implies higher imports, which subtract from gross domestic product.

"You're going to get a little bit of a hit to consumer spending," said Michael Hanson, an economist at Bank of America in New York.

The effect on consumer spending might not show up right away, however. Consumers might compensate for higher gasoline prices by cutting back on the saving they do every month.

Retail sales data from the Commerce Department due on Friday is expected to be generally upbeat, Hanson said, a sign that higher prices at the pump aren't yet cutting into spending.

The report on retail sales, due at the same time on Friday as the inflation report, is expected to show sales climbed a solid 0.7 percent in August, according to a Reuters poll of analysts.

What isn't clear is how long gasoline prices will stay as high as they are. A sustained increase in energy prices could lead to more generalized inflation pressure, which could provoke some worry at the Fed, particularly among the policymakers there who worry most about inflation.

With the job market so weak, however, most economists and investors expect the increase in inflation to be short-lived. The 12-month rate of inflation could fall to 1.2 percent by August 2013, according to a measure of inflation expectations calculated by the Federal Reserve Bank of Cleveland.

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