U.S. Consumer Price Gains Slow to 0.1% Annual Pace

By Timothy R. Homan

Jan. 16 (Bloomberg) -- The cost of living in the U.S. fell in December as the recession deepened, capping the smallest annual gain in a half century.

Americans paid 0.1 percent more for goods and services in 2008, the Labor Department said today in Washington. Consumer prices fell 0.7 percent in December after dropping 1.7 percent the prior month. Excluding food and energy, costs were unchanged.

The worst holiday shopping season in at least four decades is forcing retailers such as Macy’s Inc. and J.Crew Group Inc. to cut prices to lure customers. Today’s report signals deflation, or a prolonged, harmful decline in prices, may become another risk facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama.

“The global contraction is keeping” inflation “in check,” said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. “The risk now is that a worsening in economic conditions brings about deflation.”

Treasuries, which fell earlier today on concern about the rising cost of government bailouts of financial companies, remained lower after the report. Yields on benchmark 10-year notes rose to 2.36 percent at 8:41 a.m. in New York, from 2.20 percent late yesterday. Futures on the Standard & Poor’s 500 Stock Index rose 1.4 percent to 850.80.

Economists’ Forecasts

Consumer prices were forecast to fall 0.9 percent, according to the median estimate of 80 economists in a Bloomberg News survey. Projections ranged from declines of 0.4 percent to 1.5 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed.

The core rate increased 1.8 percent last year, the smallest gain since 2003. Over the last three months, the rate is falling at an annual rate of 0.3 percent.

Energy costs dropped 8.3 percent last month and were down 21 percent for the year, the biggest decline since those records began in 1958. Gasoline prices decreased 43 percent in 2008, also the biggest decline on record going back to 1937.

Oil prices have fallen further this month. Crude oil futures on the New York Mercantile Exchange fell as low as $33 in intraday trading yesterday after averaging $42.04 in December.

Food prices, which account for about a fifth of the CPI, decreased 0.1 percent, led by a 2.4 percent drop in the cost of fruits and vegetables.

Cars, Air Fares

Prices for clothing, new automobiles, airline fares and recreation all decreased last month. For all of 2008, the 3.2 percent drop in new-car prices was the biggest since 1971.

Categories that normally increase saw smaller gains last year. The cost of medical care rose 2.6, the least since 1964.

Today’s figures also showed wages increased 0.6 percent after adjusting for inflation, following an increase of 2.6 percent in November. They were up 2.9 percent for 2008.

Retail sales fell 2.7 percent in December, the sixth consecutive drop and extending the longest string of declines on record, the government said Jan. 14.

Prices are falling as the economy slows. The Fed’s preferred inflation gauge, based on consumer spending and excluding food and fuel costs, will rise 1.2 percent this year, the smallest gain since 1962, according to economists surveyed by Bloomberg this month. The increase would be less than the long-term forecast of 1.3 percent to 1.7 percent that reflects policy makers’ expectations for the level of inflation given ”appropriate” monetary policy.

Bernanke’s Outlook

“Overall inflation has already declined significantly and appears likely to moderate further,” Fed Chairman Ben S. Bernanke said in a Jan. 13 speech in London. “At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term.”

The deceleration, also called disinflation, is different from the persistent decline in costs that economists call deflation.

Consumers are looking for cheaper prices on necessities such as food and clothing amid the recession. Wal-Mart Stores Inc., the world’s biggest retailer, climbed last year the most since 1999 as it started to sell $4 medicines and reduced prices on groceries, jeans and other basics attract more customers.

Still, slumping global economies forced the Bentonville, Arkansas-based company to cut its fourth-quarter profit forecast this month.

Macy’s Prices

Other retailers are slashing prices to attract shoppers amid a deepening recession. Terry Lundgren, chief executive officer of Macy’s, the second-largest department store, said he expects the company “will continue to be promotional for a very long time” after Macy’s cut prices as much as 75 percent in a sale on Jan. 10.

J.Crew’s Chief Executive Officer Mickey Drexler said the industry won’t ”ever” get back to where it’s been and that consumers are changing the way they shop. The clothing company has adjusted prices as a result, Drexler said this week.

Twenty-nine percent of U.S. shoppers are buying only essential or discounted items so far this year, compared with 18 percent a year ago, according to a survey of 1,000 U.S. consumers by America’s Research Group and UBS AG released this week.

The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the government’s broadest gauge of costs because it includes goods and services.

Prices paid to U.S. producers fell for a fifth month in December, sliding 1.9 percent, the government said yesterday. Import costs in December also decreased for a fifth consecutive month due to falling energy prices, the Labor Department said Jan. 14.

To contact the report responsible for this story: Timothy R. Homan in Washington at thoman1@bloomberg.net