Gasoline dampens U.S. inflation; mid-year rate hike in doubt

Fri Jan 16, 2015 1:29pm EST
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices recorded their biggest drop in six years in December and a gauge of underlying inflation was flat, which could make the Federal Reserve more cautious about raising interest rates.

The Labor Department said its Consumer Price Index fell 0.4 percent last month, the largest decline since December 2008, after sliding 0.3 percent in November.

In the 12 months through December, the CPI increased just 0.8 percent, the weakest reading since October 2009 and a sharp deceleration from November's 1.3 percent rise.

"The odds of a rate hike in June are fading fast," said Michelle Girard, chief economist at RBS in Stamford, Connecticut. "The recent data cannot leave the Fed feeling more confident that inflation will move higher."

While Fed officials have viewed the energy-driven drop in inflation as transitory, a strong dollar is taming underlying price pressures, which could cause them some discomfort.

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.

Other data on Friday, however, suggested the economy was growing solidly despite the soft inflation readings, with factory output rising last month and consumer sentiment hitting its highest level in 11 years in January.   Continued...

People shop during day after Christmas sales at Citadel Outlets in Los Angeles, California December 26, 2014. REUTERS/Jonathan Alcorn