CPI unchanged in the past year for first time since 1955

There's an upside and a downside regarding the most recent U.S. retail inflation data.

The upside: The Consumer Price Index rose just 0.3% in January; further, CPI was flat on a year-over-year basis for the first time since 1955, the U.S. Labor Department announced Friday.

The downside: Non-existent inflation most likely reflects the weakest demand conditions in the U.S. in more than a generation. If those weak demand conditions persist, companies will not have sufficient pricing power needed to expand operations -- a circumstance that historically has constrained U.S. GDP growth, economists agree. Inflation decreased a revised 0.8% in December 2008.

Also, January core inflation, which excludes the often-volatile food and energy component, rose just 0.2%.

Economists surveyed by Bloomberg News had expected January consumer prices to increase 0.3%, core prices to increase 0.1%, and year-over-year prices to decline -0.2%.

Core inflation is tame

Further, over the past 12 months, the core CPI has increased 1.7%, that key metric's lowest yearly increase since mid-2004. The U.S. Federal Reserve used the 12-month core CPI rate as one of its primary gauges of consumer-based inflation, and the rate remains within the Fed's "comfort zone" for inflation.

In January, housing price were unchanged, food prices rose 0.1%, energy prices rose 1.7%, apparel climbed 0.3%, transportation rose 1.3%, medical costs rose 0.4%.

Economic Analysis: Although retail January inflation came in at 0.3%, the flat year-over-year (January 2008-to-January 2009) figure is the tell-tale stat, as it shows further signs of deflation. Deflation -- a protracted, systematic decline in prices and wages -- occurs in pronounced recessions and other conditions where demand is non-existent. Economists and business executives fear deflation because it robs companies of the ability to increase revenue and hurt's the economy's ability to grow. The January data also provided further evidence that the greater risk to the U.S. economy is deflation, not inflation.

Investors should interpret the January and year-over-year inflation data as bearish for the U.S. economy and the stock market. The Fed, Congress, and other policy makers with need to continue to use quantitative easing, fiscal stimulus and other mechanisms to create demand and prevent the economy from entering a deflationary spiral that prolongs and deepens recessions.

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