Inflation rate flat amid price confusion

NEW YORK (CNNMoney.com) -- Deflation? Inflation? Which is it?

Overall, food and energy costs drove consumer prices up -- albeit very slowly -- over the last 12 months, but stripping out those components, prices are flat year-over-year, the government said Friday.

Consumer prices rose 1.1% over the last 12 months ending in August, the Bureau of Labor Statistics said. While any number above zero means prices are rising, that's a slightly slower pace than in July, when the annual inflation rate was at 1.2%.

Amid confusion over whether inflation or deflation is the bigger threat to the U.S. economy, Friday's sluggish CPI number doesn't do much to assuage fears of falling prices. While prices are still rising, the slow rate is leaning dangerously close to deflation.

"Inflation is already too low. It won't necessarily fall below zero, but if it goes any lower, that's bad," said Dean Baker, co-director and economist with the Center for Economic and Policy Research.

Sluggish inflation poses a unique challenge to the economy. On one hand, prices that rise only very little may seem like a welcome break to struggling consumers.

But on the other hand, those modest price increases don't offer companies enough of a revenue boost to hire workers, at time when high unemployment is the major factor stalling the recovery, said Mark Vitner, a senior economist with Wells Fargo Securities.

He puts the odds of deflation happening -- meaning CPI dips below zero -- at 25%.

"We don't have a whole lot of inflation right now, and the economy seems to be losing momentum. But when you look at the numbers, what we see is low rates of inflation, no actual deflation," he said.

Rising energy and food prices are the biggest drivers keeping the overall index above water, with gasoline rising 4.1% over the last year and food rising 1%. The entire energy index -- which includes fuel, electricity and gas utilities -- rose 3.8%.

Stripping out the volatile food and energy component though, the so-called core CPI remained unchanged, showing prices rose 0.9% over the last year.

That low number means that prices excluding energy and food are also rising, but at a snail's pace -- a trend that mimics the economy at large, which has also grown lately but at a much slower rate than economists' had previously hoped.

For the month of August, overall prices were up 0.3%, in line with the 0.3% increase in July. Economists surveyed by Briefing.com were expecting a 0.2% increase during August.

Meanwhile, the core CPI was flat at zero in August, slightly lower than economists' forecasts for a 0.1% increase.