Wholesale inflation fell in August by the largest amount in about 2 years.

The US Labor Department says wholesale prices fell 0.9% in August, or nearly twice the 0.5% decline forecast by many economists. Core inflation, which excludes energy and food, rose 0.2% in August, meeting expectations, and below July’s 0.7% increase.

The Federal Reserve has staked its policy on the belief that prices will moderate in 2008 as economic growth slows.

The price of a barrel of oil recently fetched $101.64 on the New York Mercantile Exchange, about a 31% decrease from the peak of $147.27 reached on July 11. However, oil is likely to temporarily spike up as Hurricane Ike moves to the Texas coast and threatens to disrupt production. Prices have declined as demand fell in the slowing economy.

The Labor Department says the 0.9% decrease in August followed advances of 1.2% in July and 1.8% in June. Leading the decline in prices for finished goods, the index for energy products fell 4.6% in August after rising 3.1% in July. Prices for goods other than food and energy rose 0.2% after a 0.7% increase in July. The index for consumer foods increased 0.3% in August, or the same rate as July.

Producer prices are one of 3 monthly gauges of inflation reported by the Labor Department. Import costs declined in August at the steepest rate in nearly 2 decades. Consumer prices will be reported next month and may be about the same after rising in July.

The Federal Reserve may hold its benchmark interest rate at 2% through the first 3 months of 2009, analysts say.

Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, Speaking July 7 at the University of California at San Diego Economics Roundtable, said the recent strength of spending data has been “somewhat reassuring.”

Yellen continued:

“The pace of consumer spending, in particular, has been surprisingly robust of late, fueled in part by tax rebates...The spending appeared to be broad-based, with the not-so-surprising exception of motor vehicles, where sales have been very weak in recent months.

"On the business side, orders and shipments of non-defense capital goods excluding aircraft also look to have rebounded somewhat in recent months. In addition, export growth has been a continuing bright spot. It has been buoyed by continued strong growth abroad and by the weakening of the dollar.

"The strong incoming data on spending ease my concerns somewhat about the intensity of the slowdown. However, a few months of data don't make a trend, particularly because we can't be sure how large the effects of the roughly $100 billion temporary tax rebate program have been. About $50 billion of the rebates were sent out in May.”

However, shoppers again cut back in August, reducing sales at the nation’s retailers for the second month in a row.

The US Commerce Department reports that retail sales fell by 0.3% in July. Most economists expected sales to increase by 0.3%. Sales in July fell 0.5%, the weakest showing in 5 months.

Sales declined in electronics, appliances, clothing, building supplies and at department stores.