US consumer prices post biggest drop in six years

US consumer prices recorded their biggest decline in six years in December and a gauge of underlying inflation held steady, 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. US Treasury debt prices held gains, while the dollar trimmed gains versus the euro and US stock index futures pared losses. "It seems nearly certain that further declines in headline inflation rates will be seen in coming months. What is important though is that core inflation rates are not necessarily immune to declines in oil and gasoline," said Dan Greenhaus, chief strategist at BTIG in New York.
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. 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. Inflation is running below the Fed's 2 percent target, despite a strengthening labor market and overall economy. A second report from the Fed showed factory output rose 0.3 percent last month, rising for the fourth straight month.
Darkening prospects for the global economy could also complicate policy decision for the US central bank. Many economists have been expecting the central bank to raise interest rates by June. However, following December's surprise declines in retail sales and average hourly earnings, rate futures have pushed back bets for a hike to the second half of the year. 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 US 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 last month, 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. Away from food and energy, shelter costs increased 0.2 percent last month after rising 0.3 percent in November.