WASHINGTON >> A plunge in gas prices last month lowered consumer prices by the largest amount in six years. But excluding the volatile food and energy costs, prices roses slightly.
The Labor Department said Thursday that the consumer price index fell 0.7 percent in January, the sharpest drop since December 2008. Tumbling prices at the pump drove nearly all of the decline.
Core prices, which exclude food and energy, rose 0.2 percent. The cost of clothes, hotels and restaurants all rose.
Overall consumer prices have slipped 0.1 percent over the past 12 months. It is the first yearly drop in five years. And over the past year, core prices have risen just 1.6 percent, below the 2 percent level the Federal Reserve considers optimal for a healthy economy.
Excessively low inflation is complicating the Fed’s decision on when to begin raising the short-term interest rate it controls. Most analysts think the Fed will start to raise rates from record lows in June or September. But persistently low prices could delay that decision.
Fed Chair Janet Yellen told Congress this week that she expects the effects of falling gas prices to fade in coming months, causing inflation to creep back toward the Fed’s 2 percent target.
Most economists agree. Paul Ashworth, chief U.S. economist at Capital Economics, expects core inflation to rebound to 2 percent by early next year.
“There is little danger that this temporary bout of falling energy prices will develop into a more insidious … deflation spiral,” Ashworth said.
Deflation, which occurs when prices are broadly falling, can feel like a good thing to consumers but can be damaging for an economy. Declining prices can lead consumers to delay spending as they wait for better deals. That slows growth and forces companies to cut wages. Japan has struggled to escape a deflationary, slow-growth trap for more than two decades.
Yet Ethan Harris, global economist at Bank of America Merrill Lynch, says price declines driven by cheaper gas typically don’t cause deflationary spirals. Instead, lower gas prices free up more cash for Americans to spend, which tends to strengthen economic growth.
In addition, there are already signs that oil and gas prices have leveled off after collapsing nearly 60 percent from July through January.
Gas prices had fallen in January to an average of $2.03 a gallon nationwide, the lowest level in five years, according to AAA. But the average reached $2.33 on Wednesday, up 6 cents in just a week.
