U.S. consumer prices post biggest drop in six years

[January 16, 2015]  WASHINGTON (Reuters) - U.S. consumer prices recorded their biggest decline in six years in December and underlying inflation pressures were benign, which could bolster the case for delaying the first interest rate increase from the Federal Reserve.

The Labor Department said on Friday its Consumer Price Index fell 0.4 percent last month, the largest drop since December 2008, after sliding 0.3 percent in November. In the 12 months through December, CPI increased 0.8 percent.

It was the weakest year-on-year reading since October 2009, and followed a 1.3 percent rise in November. Last month's readings were in line with expectations.

While Fed officials have viewed the energy-driven inflation weakness as transitory, a strong dollar is taming underlying price pressures, which could cause some discomfort.

Darkening prospects for the global economy could also complicate matters for the U.S. central bank.

Inflation is running below the Fed's 2 percent target, despite a strengthening labor market and overall economy.

Many economists expect the central bank will raise interest rates by June, but the chances for a second-half hike have risen after December's surprise declines in retail sales and average hourly earnings.

The so-called core CPI, which strips out food and energy, was unchanged in December. It was only the second time since 2010 that it did not increase. The core CPI had nudged up 0.1 percent in November. In the 12 months through December, the core CPI rose 1.6

percent, the smallest gain since February, after increasing 1.7 percent in November.

Slower global demand and increased shale production in the U.S. have caused an oil glut, sending crude prices tumbling.

Brent crude prices approached a six-year low this week, a sign that overall inflation pressures will remain subdued in the months ahead.

Gasoline prices tumbled 9.4 percent, the biggest drop since December 2008, after declining 6.6 percent in November. Gasoline has now declined for six straight months. Energy prices recorded their biggest decline since 2008.

Food prices rose 0.3 percent after rising 0.2 percent the prior month. Within the core CPI, shelter costs increased 0.2 percent last month after rising 0.3 percent in November.

There were declines in the prices for apparel, transportation and used cars and trucks.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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