Updated from 9:05 a.m. EDT

Prices for consumer goods declined for the first time in 14 years in August, reinforcing the widely held view that inflation remains in check and that the

Federal Reserve

is unlikely to change interest rates in the remainder of the year.

Amid falling prices for transportation and gasoline, the

Cosumer Price Index

, a broad measure of inflation that gauges the price change in a basket of goods and services, fell 0.1% in August, the

Labor Department

said Friday. It was the first drop in the index since April of 1986. A group of economists polled by


expected the index to rise 0.2% in August.

However, the data is unlikely to have a large influence on the stock and bond markets, since the core inflation rate -- which excludes the often-volatile food and energy sectors and is regarded as a clearer indicator of the trend in inflation -- rose 0.2%, exactly in line with economists' expectations.

Friday's figure offers fresh evidence that inflation remains in check, despite robust growth and low unemployment, the product of a series of interest rate hikes by the Federal Reserve. Over the last 15 months, the Fed has raised rates six time to stem the threat of inflation, but held off at its most recent meeting Aug. 22 amid signs the economy is cooling.

"These are numbers to warm a Fed chairman's heart," said Oscar Gonzalez, an economist at

John Hancock Financial Services

. "Roaring productivity is keeping economic growth booming and inflation completely benign."


Labor Department

reported in early September that U.S. workers increased their productivity in the second quarter, suggesting that the output of the average worker is rising faster than average wages. This further supports the new economy mantra that an increase in productivity has severed the traditional relationship between inflation and unemployment, which posits that low unemployment will eventually lead to inflation because workers will demand wage increases.

And Friday's price data is another number that furthers that view.

TheStreet Recommends

"The CPI was a friendly report," said Anthony Karydakis, senior financial economist at

BancOne Capital Markets

. "It shows that nothing ominous is brewing on the inflation front."

However, Karydakis noted that a run-up in oil prices over the last year and a half have not led to a rise in the price for consumer goods. "It hasn't started spilling over. That's a pleasant surprise," he said. The threat that producers may begin to raise prices to compensate for higher energy costs will put policymakers on alert, he added.

During the first eight months of 2000, consumer prices rose at a 3.4% annual seasonally adjusted clip. This compares with an increase of 2.7% for all of 1999.

The index for housing increased 0.2% in August, following a 0.4% rise in July. The index for fuels and utilities, which rose sharply in both June and July, moderated in August. Fuel oil decreased 0.1% in August, following a 20.5% rise over the past seven months. Prices for natural gas, which rose 20.1% in the first seven months of 2000, fell 0.7% in August.

The transportation component of the price index fell for the second consecutive month, down 1.1% in August.

Also giving economists a surprise Friday was data that showed that output in the nation's factories rose unexpectedly in August, led by surprise growth in the utility and automobile sectors.

Industrial production

rose 0.3% in August, the Federal Reserve said Friday, a jump from a revised unchanged figure in July. Originally, the government estimated that production rose 0.4% in July. Analysts surveyed by


had expected industrial production to be flat in August.

In addition, the portion of the nation's industrial capacity that is currently in use, known as capacity utilization, came in at 82.3%, a rise of 0.1%.

Manufacturing output rose 0.1% in August, the same rate of increase in July.

The output of consumer goods rose 0.5% in August, after a decline of 0.3% in July.

Within consumer durable goods -- those items meant to last at least three years -- an increase in the output of automotive products, mainly motor vehicle assemblies and replacement tires, more than offset a decline in the production of other durable goods.

Within non-durable consumer goods, energy products jumped 3.7% in August, led by gains in residential sales of electricity and fuel oil. The output of non-energy products ticked up just 0.1%.

Meanwhile, consumers became more optimistic in the first two weeks of September, according to a survey by the

University of Michigan

. Its preliminary consumer sentiment index rose to 108.8, compared with 107.3 in August. The university will release its final report for the month on the last business day of September.