The U.S. consumer-price index increased 0.3%, after a gain of 0.2% in July. The Labor Department said the headline CPI rose from 2.1% to 2.2% in August, but core inflation slipped to1.3% from 1.5% in the prior month.

Economists had expected a 0.3% increase in the overall index and a 0.2% gain in the core index. The results should keep U.S. interest rates low for a long time, or even led to a further cut, economists say.

Bank of Montreal says core inflation is now at a 37-year low. Sliding auto prices were the big culprit, and there was weakness in household furnishings and operations.

“The sizeable amount of slack in the U.S. economy continues to exert downward pressure on inflation. This should heighten the Fed’s concern about the risk of deflation (though the risk remains small),” says BMO. “As a result, today’s CPI report supports the view that the Fed will refrain from raising interest rates for a long time, and could cut rates if the recovery stumbles.”

Despite the dip in the core CPI, RBC Financial says that consumer prices do appear to be stabilizing, with very few signs of deflation on the horizon. “Overall, it’s clear that although disinflation remains a risk, as pointed out by the Fed, if the stronger growth witnessed in the U.S. over the past few months continues, it will be a diminishing one.”

BMO Nesbitt Burns agrees with the economists at its parent, saying, “The lower-than-expected CPI gives the Fed cover to maintain its bias toward easing due to unwanted further disinflation. The Fed’s view is that slack threatens to push CPI down and that the recent 1%-ish core reading is overstating actual inflation by half a point or so. Moreover, the energy price hikes are now fading as oil prices dip lower.”

CIBC World Markets says that it favours one more interest rate cut in the U.S., in response to weak inflation numbers. “This report is right in line with our view that further disinflation is in store,” it says. “We expect core inflation to dip below 1% by early next year, with headline inflation even lower as energy prices are compared to the war-inflated highs of early 2003.”

“Longer term, continued benign inflation will push the calendar for an eventual turn to monetary tightening well beyond that envisaged by the bond market. Indeed, odds still favor one more Fed ease next year if, as we expect, tame inflation is accompanied by a slower quarter or two of growth,” CIBC says.