Consumer prices fall in Dec.; 2008 gain is smallest since 1954

WASHINGTON -- USA-ECONOMY/CPI (URGENT):U.S. consumer prices fall for 3rd month in Dec

The consumer price index fell 0.7% in December, the government said Friday, posting its lowest annual gain since 1954 for all 2008.

December's 0.7% drop follows a 1.7% decline in November.

Excluding volatile food and energy prices, so-called core inflation was unchanged in December. For the year, it was up a moderate 1.8%, compared with a 2.4% increase for all of 2007.

On a year-over-year basis, the consumer price index rose a scant 0.1% from December 2007, braking from a 1.1% increase the prior month. It was the weakest reading since CPI fell 0.7% in 1954. The index rose 4.1% in 2007.

The big improvement over 2007 occurred because of the sizable declines in energy prices in recent months.

Energy prices fell 8.3% in December, after declining 17% the prior month. Compared with December last year, energy prices were down a record 21.3%, with gasoline costs down 43.1%.

In December, gasoline prices fell 17.2%, largest monthly decline on records that go back 71 years.

Food costs were unchanged in December, and rose 5.8% for all last year.

In other reports Friday:

• The Federal Reserve said production at the nation's factories, mines and utilities fell 2% last month, after a 1.3% decline in November.

For all last year, industrial production declined 1.8%, a sharp reversal from the 1.7% increase in 2007. It marked the worst showing since a 3.4% decline in 2001, when the country was also in a recession.

The Fed said big industrial outlets were operating at 73.6% of capacity in December, down from 75.2% in November. That was 7.4 percentage points below the average from 1972 to 2007.

• The Reuters/University of Michigan Surveys of Consumers said its preliminary index reading of confidence for January rose slightly, to 61.9 from December's 60.1. But the figure is still near a half-century low.

The sizable slowdown in inflation gave consumers more spending power. Average weekly earnings, after adjusting for inflation, showed an increase of 2.9% last year, a big improvement from 2007, when average weekly earnings fell 1%.

However, the typical household may not feel those benefits as they watch the value of their homes and stock holdings plunge, and see job layoffs soar.

The December CPI number won't affect cost of living increases for Social Security recipients, whose increases are based on the change from the third quarter of 2007 to the third quarter of 2008. They will get a 5.8% cost of living increase this year.

The big declines in overall prices in recent months came after soaring energy and food prices in early 2008. But the worst financial crisis since the 1930s sent the economy into a tailspin in the fall. The Fed is now focused on trying to ensure the financial turmoil does not push the country into a prolonged recession.

The Fed cut a key interest rate to nearly zero last month and economists believe it will keep rates at that level the next year, until the economy begins to show signs of recovering.

"Inflation is way down on the list of worries right now," said David Wyss, chief economist at Standard & Poor's in New York. "The worry right now is getting the economy to rebound."

Any Fed worries about inflation have evolved into concerns about possible deflation, a prolonged bout of falling prices, which has not been seen in the U.S. since the Great Depression.

Wyss ranked the possibility of deflation as low, but said the risk could rise significantly if the current financial crisis and recession worsen significantly.

To keep that from occurring, President-elect Barack Obama has pushed Congress to release the second half of the $700 billion financial rescue package, gaining a victory on Thursday when the Senate rejected an effort to block release of the second $350 billion.

Obama also wants Congress to pass a sweeping economic stimulus bill. House Democrats, working closely with Obama, on Thursday unveiled a proposal calling for $825 billion in federal spending and tax cuts over the next two years to revive the moribund economy.

Economists believe inflation will slow even further this year as long as oil prices don't shoot up again. While a global recession is expected to depress energy demand, analysts say a supply disruption in the volatile Middle East is always a threat that could send prices higher.

Oil prices are more than $100 per barrel below their all-time high of $147 a barrel in mid-July. Average gas prices are around $1.80 per gallon, compared with $3.05 a year ago, according to auto club AAA, the Oil Price Information Service and Wright Express. Analysts predict gasoline prices will fall in coming months, further helping to contain inflation.

While the big drop in prices at the pump acts like a tax break, giving consumers money they can spend elsewhere, the weak economy and soaring layoffs are keeping them from spending. That has translated into tough times for the nation's retailers.

This week alone, department store chain Gottschalks put itself up for sale and said it had filed to reorganize in a Chapter 11 bankruptcy, discount clothing chain Goody's Family Clothing filed for Chapter 11 protection, luxury retailer Tiffany lowered its year-end profit forecast and Neiman Marcus Group said it was cutting about 375 jobs. Last week, Macy's said it will close 11 underperforming stores in nine states, affecting 960 employees.

Also last week, Wal-Mart Stores reported smaller-than-expected sales gains in December. Other retailers, including Sears Holding, which operates Sears and Kmart stores, Saks and Gap reported big sales declines, wrapping up the worst holiday shopping season in at least four decades.