WASHINGTON (AP) — Consumer prices rose modestly in January, propelled by higher energy costs, but economists said they remain more concerned about the threat of price declines throughout the economy.
That's because even with last month's increase in consumer prices, inflation has been flat over the past year, the lowest reading in more than a half-century.
The Labor Department said Friday that consumer prices rose by 0.3 percent last month, which was the first increase since prices were up 0.7 percent in July. Prices were flat in August and September, and then posted huge declines in the fourth quarter of last year.
The November plunge of 1.7 percent was the largest on government records going back 61 years. Prices fell by 0.8 percent in both December and October, the government said Friday, slightly revising lower the original estimates.
While falling prices appeal to consumers, the 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.
Even with the 0.3 percent 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 percent for a 12-month period ending in August 1955.
Core inflation, which excludes energy and food, showed a modest increase of 0.2 percent, slightly higher than the 0.1 percent gain economists expected. Over the past 12 months, core inflation rose 1.7 percent, the lowest reading since a similar increase for the 12 months ending in August 2004.
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.
Economists have grown more concerned about deflation in recent months as the severity of the recession, already the longest in a quarter-century, intensifies.
"We are having a massive asset-price deflation in terms of falling home prices and falling stock prices," said Nigel Gault, chief U.S. economist at IHS Global Insight. "The Federal Reserve's worry should definitely still be deflation."
Wall Street fell sharply Friday. The Dow Jones industrials hit new six-year lows with investors worldwide selling on pessimism about the global economy. The Dow tumbled about 120 points in afternoon trading, a day after closing at its lowest level since Oct. 9, 2002.
Energy prices rose 1.7 percent in January, the first increase following five months of big declines. The advance was led by a 6 percent jump in gasoline prices. Even with that gain, prices at the pump are still more than 40 percent 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 percent in January and over the past year increased 5.2 percent. Prices for meat, dairy products and fruits and vegetables all were lower in January than a month earlier.
The 0.2 percent rise in core inflation reflected higher prices for such things as medical care, which rose 0.4 percent, and education costs, which increased 0.3 percent.
Clothing prices rose 0.3 percent 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 percent, 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 1 percent this year, down from a projection of between 1.3 and 2 percent 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.
Copyright 2009 The Associated Press.