NEW YORK (CNNMoney) -- The highest inflation rate in three years put a squeeze on consumers' wallets in August, according to the government's key price measure. The Consumer Price Index rose 3.8% in the month compared to a year earlier. That's up from 3.6% in July and is the highest reading since September 2008. Print On a month-to-month basis, prices rose 0.4% in August, twice the rate of increase forecast by economists surveyed by Briefing.com. Consumers have been paying more for a lot of key goods and services.
Clothing prices in August were up 4.2% over the year, while new car prices rose 3.8%. Used car prices were up even more, rising 5.4%. And medical care was 3.2% more expensive than a year ago. Gas prices rose at a slower pace in August than the previous month, but were still 1.9% higher than the July reading. Over the last 12 months, overall energy prices are up 18.1%, while food prices have risen 4.6%. Stripping out volatile food and energy prices, the so-called core CPI rose 2.0% annually, at the high end of the range viewed as acceptable by many economists, including those at the Federal Reserve. But not everyone thinks higher inflation is necessarily a bad thing. Some leading economists believe the Fed should accept and even encourage a higher level of inflation as a possible solution to prolonged economic weakness. 0:00 / 4:01 Harvard economist: 'We never left the recession' Higher inflation would help reduce the value of debt weighing down spending, according to Harvard University Professor Kenneth Rogoff. He said the need to cut debt levels is the biggest problem facing the economy today. "The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years," Rogoff wrote in a recent article. His ideas have received some support from other economists across the political spectrum, including some within the Federal Reserve. But they are still a minority view seen to be at odds with the Fed's dual mandate to promote stable prices and full employment. Fed Chairman Ben Bernanke has repeatedly said that the central bank believes inflation isn't a significant threat at the moment. But higher prices can be a drag on economic growth as consumers and employers struggle with having less money to spend. Wednesday the Commerce Department reported disappointing retail sales figures. The higher-than-expected inflation reading could dash some hopes that the Fed was preparing to buy more assets in an attempt to jumpstart the struggling U.S. economy. "The continued rise in inflation in August is another reason to suspect that the Fed will shy away from a further round of quantitative easing for the time being, even though the incoming data on the real economy continues to disappoint," said Paul Ashworth, chief U.S. economist for Capital Economics. Some Fed members are believed to favor a third round of purchases, a policy known as quantitative easing, or QE3. But other so-called inflation hawks, are worried that pushing more money into the economy would have limited benefit and risk higher prices down the road. Another widely-anticipated possibility -- a shift of assets from short-term Treasuries to long-term bonds in an effort to lower long-term interest rates -- could still be on the table when the Fed meets next week.
