Annual inflation rate at 0%, consumer prices rise 0.3% in January

Diving energy prices drove U.S. consumer prices flat over the past 12 months, marking the lowest inflation rate in more than a half a century, the Labor Department reported Friday. However, energy costs have been ticking upward of late and pulled consumer prices back up in January.

"A bit of inflation is encouraging," Mark Zandi, chief economist at Moody’s Economy.com, was quoted on NYTimes.com. "It means businesses aren’t completely giving up and slashing prices. The fact that they can at least hold the line on their price cuts is a positive."

The Consumer Price Index (CPI), the most closely watched gauge for inflation, rose 0.3% in January following an adjusted 0.8% slide in December. The increase was in line with market expectations and the first positive advance in six months. Still, most economists believe prices will again decline.

"We’re in the heart of the recession right now, and with demand falling rapidly, we can expect downward pressure on prices," Chris Rupkey, chief financial economist in New York at Bank of Tokyo-Mitsubishi UFJ Ltd., was quoted on Bloomberg.com. "Everything is heading in the same direction, which is down. Sales are down, profits are down, prices are coming down."

More and more economists are now focusing on the dangers of continual, out of control falling prices, known as deflation. Even the Federal Reserve has discussed the risks. (See Long-term inflation target set… and Deflation a key risk in 2009…)

Consumer price details

The core CPI, which excludes volatile food and energy prices, increased 0.2% last month, or about double what the market was expecting. Core prices have risen 1.7% over the last year, the lowest 12-month rise in nearly five years.

Rising January prices include:

• Energy prices jumped 1.7%, with gasoline rising 6%. For the year, however, the index is down 20.4%.
• Food prices climbed 0.1%, although the food at home index declined 0.1%
• Clothing was up 0.3% following a decline of 0.6% in Dec.
• New vehicles prices rose 0.3% after 12 months of straight declines
• Medical care was up 0.4%, with prescription drugs rising 0.5%
• Education prices climbed 0.3%

Transportation fell 1.8%, with air fares dropping 2.1% last month. Housing prices, which accounts for about 40% of the CPI index, were unchanged for the second straight month, but were up 2.2% in the past year.

In a separate Labor Department report Thursday, producer prices rose 0.8% in January, reversing a five-month declining trend. A sister report to the CPI, the Producer Price Index measures prices at the factory door and inflation pressures before they reach the consumer.