Wall Street sees US inflation defeated

America has conquered inflation. This was the conclusion that US financial markets drew after figures showed that prices at the factory gate fell unexpectedly in August. It was the third month running there had been no increase in prices.

The bond market rallied in the expectation of further cuts in interest rates by the Federal Reserve, whose policy committee meets in two weeks' time. The dollar hit an eight-month high against the yen, approaching 101, and the Dow Jones index surged more than 40 points to close at a new record of 4747.21.

Laura Tyson, President Clinton's economic adviser, said the inflation performance was pleasing. ''There are no signs at this point of any significant incipient inflationary pressures,'' she said. Analysts on Wall Street shared her optimism. ''There was already a generally positive outlook for inflation, and that has been reinforced,'' said Raphael Marrone of investment bank Deutsche Morgan Grenfell in New York.

Prices for finished manufactures fell by 0.1 per cent in August, taking their year-on-year rate of increase down to 1.3 per cent. This headline figure was helped by a 0.9 per cent decline in the price of energy goods. Food prices were unchanged.

The ''core'' index, excluding food and energy, rose 0.1 per cent during the month, to a level only 2 per cent higher than a year earlier. A surprise increase in car prices was offset by flat prices for clothing.

There were more encouraging signs in the inflation pipeline. The cost of manufacturers' materials fell 1.4 per cent, to stand 1.7 per cent lower than a year earlier. Excluding energy costs and foodstuff, the fall in August was 0.9 per cent.

Some economists remained doubtful that the Fed would cut rates at the 26 September meeting of its Open Markets Committee. Mark Cliffe at HSBC Markets said: ''It will want further evidence on growth and good news on the budget.'' Clashes between the administration and Congress over the Federal budget are expected to flare as the 30 September deadline for agreement approaches.

However, a majority in the financial markets reckons interest rate reductions later in the year are likely. Figures on consumer prices, out today, retail sales and industrial production will provide further clues about the state of the US economy.