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.
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Other data on 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.
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 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 are not necessarily immune to declines in oil and gasoline," he said.
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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 did not 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 does not look like it will reach the U.S. central bank's 2 percent target anytime soon. Indeed, some economists think it could dip 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.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tim Ahmann)