US annual inflation wiped out, deflation looms

Annual US inflation disappeared in January in the weakest reading in more than a half century, data showed Thursday, stoking debate over deflation risks in the recession-mired economy.

The Labor Department reported that the consumer price index (CPI) for last month was unchanged from January 2008 under the effect of a precipitous fall in energy prices from July record peaks.

It was the weakest annual inflation reading since August 1955, the department said, coming as the country entered its second year of recession. Consumer demand has tanked in the face of sharply rising unemployment and the worst global economic crisis since the Great Depression.

Last year CPI had ended virtually flat, rising a mere 0.1 percent in December from a year ago. The smallest calendar year increase since 1954 highlighted plummeting consumer demand, and followed 4.1 percent inflation in 2007.

On a monthly basis, the Labor Department said CPI rose for the first time in six months, by 0.3 percent in January, matching most analysts's forecast.

The monthly CPI headline number had fallen 0.8 percent in December. The last time it climbed was in July, by 0.7 percent, when crude oil prices hit all-time highs above 147 dollars a barrel.

Core CPI, which strips out volatile food and energy prices, rose 0.2 percent in January from December, when it was flat. The number was slightly higher than analysts' forecast of a 0.1 percent rise. On a 12-month basis, core inflation was up 1.7 percent.

Analysts were divided over whether the Labor Department report pointed to risks of deflation, a pernicious downward spiral of falling prices, earnings and economic activity that is difficult to counter.

The Federal Reserve this week projected the economy would shrink in 2009 by as much as 1.3 percent, following a 3.8 percent contraction in the 2008 fourth quarter.

"The price rises may allay deflation fears temporarily, but they probably reflect a temporary bounce at the start of the year after severe discounting during the holiday season. Deflation risks remain," said Nigel Gault, chief US economist at IHS Global Insight.

But Dean Maki at Barclays Capital Research focused on the rise in core inflation: "The report should put to rest some of the fear that the weak core readings of the past few months suggested that core deflation was a possibility in the near term."

Maki nonetheless emphasized that core inflation was expected to slow on a year-over-year basis in coming months "as slack in the economy builds."

Energy prices led the January rise in consumer prices, climbing 1.7 percent after falling 9.3 percent in December, driven by a 6.0 percent surge in gasoline prices.

Compared with a year ago, energy prices were a hefty 20.4 percent lower and gasoline prices were down 40.4 percent.

Consumer food prices edged up 0.1 percent on a monthly basis and were 5.2 percent higher than a year ago.

Disinflation, a decrease in the inflation rate, appeared to be the overriding trend, despite the gain in energy prices.

"Disinflationary pressures slowed down with the modest rebound in energy prices. However, inflation should continue to decrease in the coming months, turning negative for most of 2009," said Elsa Dargent, an analyst at Natixis.

Ian Shepherdson, chief US economist at High Frequency Economics, also saw prices continuing to fall as the economy sinks further into the recession that began in December 2007.

"Disinflation pressure is still intense and will stay that way for some time," Shepherdson said.

On Thursday, the Labor Department reported US wholesale prices -- inflation in the pipeline -- rose 0.8 percent in January after five months of decline, driven by higher energy prices, but were down 1.0 percent from a year ago.