Consumer prices in US drop by most in six years as fuel slumps

[WASHINGTON] The cost of living in the US declined in December by the most in six years, reflecting a plunge in energy costs that's keeping inflation from rising toward the Federal Reserve's goal.

The consumer-price index dropped 0.4 per cent, the biggest decline since December 2008, after falling 0.3 per cent in November, a Labour Department report showed Friday in Washington. The median forecast of 89 economists surveyed by Bloomberg called for a 0.4 per cent decline. Excluding volatile food and fuel, the so-called core measure was unchanged, failing to rise for only the second time since 2010.

The biggest drop in clothing costs since 1998 combined with falling air fares and cheaper new and used cars signal the deceleration in inflation is spreading beyond energy as Japan and Europe are in or near a recession and some emerging markets cool. Sustained broad-based price declines test Federal Reserve Chair Janet Yellen's view that the drop in fuel won't reverberate through the economy.

"It's going to take a little bit of time for the pass- through from lower energy prices to work its way into core prices, but I think core inflation's likely to slow somewhat in the near term," Gus Faucher, an economist at PNC Financial Services Group Inc in Pittsburgh, said before the report. "It's pushing inflation further below the Fed's target."

CPI estimates in the Bloomberg survey ranged from a 0.8 per cent drop to a 0.1 per cent advance.

Core Rate The unchanged reading in the core gauge followed a 0.1 per cent rise in November. Economists had forecast a 0.1 per cent gain, according to the survey median.

Overall consumer prices rose 0.8 per cent in the 12 months ended in December, the smallest year-to-year gain since October 2009. They were up 1.3 per cent the prior month. The core measure increased 1.6 per cent from December 2013 after climbing 1.7 per cent.

Energy costs slumped 4.7 per cent in December from a month earlier, the most since December 2008. Prices at the pump have been declining since the middle of last year, helping to cushion household budgets. The average price of a gallon of regular unleaded gas was US$2.08 on Jan 15, its lowest level since May 2009, according to data from auto group AAA.

The savings are helping retailers such as supermarket chain Supervalu Inc to stay upbeat about sales prospects.

"The big drop that we've seen in fuel cost - to us, that allows people to spend more on food, which is great," Supervalu Chief Executive Officer Sam Duncan said on a Jan 7 earnings call.

"We just hope it continues and it looks like it will." Food Prices on Friday's report showed food costs increased 0.3 per cent in December.

The cost of living decline helped boost paychecks. Hourly earnings adjusted for inflation rose 0.1 per cent, after a 0.6 per cent increase the prior month, a separate report from the Labour Department showed. They were up 1 per cent over the past 12 months, the most since February.

The Fed's 2-per cent inflation goal is based on the personal consumption expenditures index, the Commerce Department's price gauge that is tied to consumer spending. That measure climbed 1.2 per cent in the 12 months through November and hasn't been at 2 per cent since April 2012.

The central bankers are betting that strengthening employment will help push up prices, according to minutes of the Federal Open Market Committee's Dec 16-17 meeting released last week.

"Participants generally anticipated that inflation would rise gradually toward the Committee's 2 per cent objective as the labour market improved further and the transitory effects of lower energy prices and other factors dissipated," the record showed.

Any signs that wage growth is starting to pick would help Fed officials feel more comfortable raising interest rates that have remained near zero for more than six years. Payroll gains coming off their best performance since 1999 and a jobless rate that's fallen faster than expected are tightening the labour market, a sign that employers may feel pressure to boost paychecks.

Hourly earnings for employees on company payrolls will advance 2 per cent to 3 per cent on average in 2015, according to 61 of 69 economists surveyed Jan 5-7. They climbed 1.7 per cent in the year through December.

The CPI is the broadest of three price gauges from the Labour Department because it includes all goods and services. About 60 per cent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

The Labour Department's gauge of wholesale prices, which includes 75 per cent of all US goods and services, declined 0.3 per cent in December on cheaper fuel. The drop was the biggest in three years and followed a 0.2 per cent decrease the prior month, data showed Jan 15. A separate report indicated the cost of imported goods fell 2.5 per cent last month.

BLOOMBERG