WASHINGTON - U.S. consumer prices rose modestly in January, propelled by higher energy costs, but most economists and the government believe the recession will keep prices in check this year.
That's because inflation has been flat over the past year, the lowest reading in more than a half-century.
The U.S. Labour Department said Friday that consumer prices rose by 0.3 per cent last month, the biggest monthly increase since a 0.7 per cent rise in July.
But even with the January increase, which was in line with economists' expectations, inflation for the 12 months ending in January was zero. That's the lowest reading since prices actually fell by 0.4 per cent for a 12-month period ending in August 1955.
Core inflation, which excludes energy and food, showed a modest increase of 0.2 per cent, slightly higher than the 0.1 per cent gain economists expected. Over the past 12 months, core inflation rose 1.7 per cent, the lowest reading since a similar increase for the 12 months ending in August 2004.
While falling prices appeal to consumers, the U.S. Federal Reserve is on alert about the possibility of deflation, which can make a recession even worse by dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.
The last period of deflation in the U.S. occurred during the Great Depression in the 1930s, although Japan battled deflation during its "lost" decade of the 1990s.
Most economists believe that deflation is a remote threat. However, they have grown more concerned in recent months as the severity of the current recession, already the longest in a quarter-century, intensifies.
Wall Street fell sharply early Friday. The Dow Jones industrials hit new six-year lows with investors worldwide selling on pessimism about the global economy. The Dow tumbled about 100 points in morning trading, a day after closing at its lowest level since Oct. 9, 2002.
Energy prices rose 1.7 per cent in January, the first increase following five months of big declines. The advance was led by a six per cent jump in gasoline prices. Even with that gain, prices at the pump are still more than 40 per cent below year-ago levels.
Most economists believe consumers will not be battered again this year by soaring energy costs since global demand has fallen sharply in the face of a worldwide recession.
Food costs rose a slight 0.1 per cent in January and over the past year increased 5.2 per cent. Prices for meat, dairy products and fruits and vegetables all were lower in January than a month earlier.
The 0.2 per cent rise in core inflation reflected higher prices for such things as medical care, which rose 0.4 per cent, and education costs, which increased 0.3 per cent.
Clothing prices rose 0.3 per cent last month, something of a surprise given the heavy discounting retailers did to move overstocked shelves following the weakest holiday shopping season in at least four decades.
Airline fares fell 2.1 per cent, reflecting declines in jet fuel prices in recent months.
The concern about deflation represents a marked shift from last summer, when soaring energy and food prices had threatened to trigger higher inflation.
But the recession has kept a lid on prices, giving the Fed room to slash a key interest rate to nearly zero and take other measures to boost the economy. Fed chairman Ben Bernanke said Wednesday he saw little risk that the central bank's efforts could increase inflation pressures.
"Indeed, we expect inflation to be quite low for some time," he said.
In a separate report Wednesday, the Fed lowered its outlook for the U.S. economy for this year, and while it didn't use the word "deflation," officials noted "some risk of a protracted period of excessively low inflation."
The Fed expects prices to rise between 0.3 and one per cent this year, down from a projection of between 1.3 and two per cent in the fall.
Many food and consumer products companies are trying to avoid price cuts despite shrinking consumer spending. Procter & Gamble Co. chief executive A.G. Lafley told Wall Street analysts Thursday the company hopes its emphasis on value will carry it through the recession. Products such as Tide laundry detergent, Dawn dish liquid and Bounty paper towels get more done than cheaper rivals, he said.
