Consumer prices edge higher.

Gain is first for government index since July. Annual rate of inflation is lowest since 1955.

Consumer prices rose last month for the first time since July, the government said Friday, but the year-over-year inflation rate was at the lowest level in more than a half-century.

The Consumer Price Index, the key measure of prices at the retail level, was up 0.3% in January, in line with the consensus forecast of economists surveyed by Briefing.com. But the index was unchanged from January 2008 levels, the first time that reading has not shown a year-over-year increase since August 1955, when prices were falling on an annual basis.

Consumer prices fell 0.8% in December.

On an annual basis, the so-called core CPI, which strips out volatile food and energy prices, was up 1.7%, the lowest increase in nearly 5 years. Core prices rose 0.2% in January, a bit more than the 0.1% rise forecast by economists.

Even though there wasn’t a 12-month decline in CPI, it fell at an 8.4% compounded annual rate over the last three months, even with the modest rise in January. And the core CPI rose at a compounded annual rate of only 0.9% over that period, which is below the range of 1% to 2% annual rise in that closely watched reading that is widely believed to be optimal for economic growth.

With inflation in check, there has been growing concern by some economists that the economy could be hurt by deflation, or the widespread drop in prices. James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech Tuesday that deflation is the greatest risk facing the economy this year.

Lower prices are one way businesses respond to the lack of demand for their products in a slowdown. But if companies can't make a profit selling their products at the lower price, they'll respond by cutting production and laying off more people.

More job losses can cut even further into demand. But even if consumers have jobs and money, they're likely to hold off on purchases if they come to believe that prices will head even lower. All of which adds up to even more weakness in the economy.

The January increase in overall consumer inflation was due largely to a 1.7% rise in overall energy prices, which included a 6% boost in the cost of gasoline.

On a year-over-year basis, energy prices were down 20%, driven by a 40% drop in gasoline.

But the decline in energy prices was not the only thing keeping inflation in check. Overall weak demand for goods and services due to rising job losses and tight credit kept prices low for a wider range of products. Products such as clothing, hotels, video and audio entertainment, and cars and trucks were all cheaper than they were in January 2008.


CNN Money.com