Consumer Prices See Biggest Drop in 6 Years in December

consumer prices
Robert Cohen/St. Louis Post-Dispatch via AP
By Lucia Mutikani

WASHINGTON -- U.S. consumer prices recorded their biggest decline in six years in December and a gauge of underlying inflation failed to rise, which could make the Federal Reserve more cautious about raising interest rates.

Other data Friday, however, suggested the economy was still poised for solid growth despite the soft inflation readings, with factory output rising last month and consumer sentiment hitting its highest level in 11 years in January.

%VIRTUAL-pullquote-It seems nearly certain that further declines in headline inflation rates will be seen in coming months.%The Labor Department said 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 just 0.8 percent, the weakest reading since October 2009, and a sharp deceleration from November's 1.3 percent rise.

"It seems nearly certain that further declines in headline inflation rates will be seen in coming months" due to fast-falling energy prices, said Dan Greenhaus, chief strategist at BTIG in New York.

"What is important, though, is that core inflation rates aren't necessarily immune to declines in oil and gasoline," he said.

While Fed officials have viewed the energy-driven drop in inflation as transitory, a strong dollar is taming underlying price pressures, which could cause some discomfort for policymakers who had been looking to mid-year to raise rates.

The so-called core CPI, which strips out food and energy costs, was unchanged in December. It was only the second time since 2010 that it didn't increase.

In the 12 months through December, the core CPI rose 1.6 percent, the smallest gain since February.

Despite a strengthening labor market and economy, inflation doesn't look like it will reach the U.S. central bank's 2 percent target anytime soon. Indeed, some economists think it could fall into negative territory this year before rebounding.

The softness in core inflation, however, along with darkening prospects for the global economy is likely more troubling for the Fed, which will have to weigh the inflation weakness against others signs of economic strength

The 11-year high in consumer sentiment in January reported by the University of Michigan reflected gains in both employment and income, and the boost to spending power from sharply falling gasoline prices.

A separate report from the Fed showed factory output rose 0.3 percent last month, a fourth straight monthly gain.

Many economists have been expecting the Fed to raise interest rates by June. However, surprise declines in retail sales and average hourly earnings last month have spurred investors to push back their expectations for when rates will rise. Futures markets point to October.

Tumbling Oil Prices

Weaker global demand and increased shale production in the United States have caused an oil glut, sending crude prices tumbling. Brent crude prices approached a six-year low this week.

In the United States, gasoline prices last month registered their biggest drop since December 2008. The cost of gasoline has now declined for six straight months.

Food prices rose 0.3 percent after rising 0.2 percent the prior month. Away from food and energy, shelter costs increased 0.2 percent last month after rising 0.3 percent in November.

Prices for medical care commodities recorded their largest increase since May 1989.

Apparel prices, however, recorded their biggest decline since September 1998, and there were also declines in airfares and new motor vehicle prices. The cost of used cars and trucks dropped 1.2 percent.

The 7 Best Things to Buy in January
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Consumer Prices See Biggest Drop in 6 Years in December

At the end of December, gyms are mostly empty. The beginning of January turns gyms into madhouses. While it may seem smart for gyms to hike prices in the new year, they do the opposite to persuade you to join their facility versus their competitors'. In fact, says that membership fees waived by gyms in January can save you over $100.

On that same note, January is an excellent month to purchase those yoga mats, ellipticals, DVDs, treadmills, dumbbells, workout apparel and anything else that will help kick you into shape. These fitness necessities are often marked up to 70 percent off the retail price both online and in stores. Also, check out deal websites such as Groupon and Living Social for an uptick in fitness-related steals throughout January, and head to resale shops for gently used fitness equipment, especially toward the end of the month when people donate their old stuff to make room for new goods.

January is arguably the best month to buy winter clothing. For starters, retailers gear up to showcase spring apparel and, to help move product, they drop prices on those cable-knit sweaters, denim goods, scarves, boots, coats and more. Secondly, January is an excellent month to buy winter apparel because you still get plenty of wear out of whatever you buy. Note that the further into January we go, the deeper the discounts.

OK, so you don't actually buy credit cards, but you can certainly apply for a new one. In the spirit of new year's resolutions, which often include battling debt, we suggest taking advantage of the many credit card promotions this month. For example, numerous credit cards offer 0 percent annual percentage rate on balance transfers this time of year, providing you with six months to a year of interest-free debt repayment. If you have a high-interest credit card, consider transferring the balance and paying it down aggressively. Other credit card promotions include an increase in cash back and bonus miles.

Yep, it's tax season. While the thought is sure to induce a few groans, know that there are at least a few deals to be had along the way. In January through late March, you can find tax filing software for up to 50 percent off the retail price. In-person tax filing services also hold promotions, so look out for specials. We suggest signing up for emails or joining social media pages to stay in the loop on all the above.

If you have any plans to make over your home in the near future, now's the perfect time to pounce. Big retailers -- including Target (TGT), Home Depot (HD), Crate & Barrel, Sears (SHLD) and JCPenney (JCP) -- heavily discount their furniture and home goods collections in January, says The website says you can "expect to see furniture clearance sales that take between 40 percent to 75 percent off regular prices."

Philadelphia department store owner John Wannamaker started the white sale tradition in 1878 (adapted from those fashionable French). He recognized that sales dried up after the holidays and that people just didn't get out of the house and buy much during the dreary, cold months. So he ran white sales, named after the pristine snow and the products discounted. These white sales still take place to this day. Expect to find sheets, towels, curtains, napkins, and more for between 30 percent and 60 percent off the retail price.

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