U.S. inflation last year lowest since 1954

U.S. consumer prices saw their smallest increase last year since 1954, as the overall inflation rate came in at just 0.1 per cent, thanks to energy prices declines.

For all of 2008, energy prices in the U.S. retreated by 21.3 per cent compared to 2007, with gasoline prices down by 43.1 per cent, the U.S. Labour Department said Friday.

In 2007, the overall rate of inflation was 4.1 per cent.

For December, consumer prices fell by 0.7 per cent. That was a smaller drop than the 0.9 per cent retreat that economists had been projecting for the month.

December's drop was the third straight monthly decline in the rate of inflation. Gasoline prices fell by 17 per cent for the month, which was the largest drop on record going back 71 years.

A dramatic shift in economic expectations took place in 2008. In the first half of the year, economists were worried about inflation driven by soaring energy prices. Oil prices peaked at a record price of $147 US a barrel in July.

Disinflationary pressures

However, the financial crisis and the economic downturn it has brought led to a dramatic reversal in energy prices. On Friday, oil was trading at less than $45 per barrel.

BMO Capital Markets economist Sal Guatieri said risks of deflation will define 2009 and drive future movements in lending rates by the U.S. Federal Reserve.

"While gasoline prices have ticked up in the new year, the inflation rate will likely turn negative, and remain in the red for most of the year as a result of the commodities bust and deepening recession," he said in a commentary.

In addition to the effects of falling energy prices, the growing slack in the economy will also put disinflationary pressures on the so-called "core rate" of inflation, said RBC assistant chief economist Dawn Desjardins. The core rate factors out volatile components such as food and energy.

Desjardins said the U.S. core rate has broken out of its two per cent to 2.5 per cent range. It came in at 1.8 per cent for 2008, down from 2.4 per cent in 2007.

"Against this backdrop, the Fed will keep policy loose and liquidity abundant in an effort to stimulate demand and get the economy on the road to recovery," she added.