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Consumer prices edge higher

But possibility of deflation raises concerns

Associated Press / February 21, 2009
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WASHINGTON - 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 yesterday consumer prices rose 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 0.8 percent in both December and October, the government said yesterday, 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 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 US deflation occurred during the Great Depression in the 1930s, although Japan battled deflation during its "lost" decade of the 1990s.

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