Consumer prices plummet 0.7%

January index driven by cheap gas; core prices rose 0.2%

Timothy Nick (left), works with fellow traders Thursday on the floor of the New York Stock Exchange. Stock indexes remained near record highs Thursday amid mixed economic data.
Timothy Nick (left), works with fellow traders Thursday on the floor of the New York Stock Exchange. Stock indexes remained near record highs Thursday amid mixed economic data.

WASHINGTON -- A plunge in gasoline prices last month lowered consumer prices by the most in six years. But excluding the volatile food and energy costs, prices rose.

The consumer price index fell 0.7 percent in January, the sharpest drop since December 2008, the Labor Department said Thursday. Tumbling prices at the pump drove nearly all of the decline. Core prices, which exclude food and energy, rose 0.2 percent.

Despite the sharp drop in the overall index, economists see signs that many prices are moving higher. The cost of services, such as hotels, restaurant food and rents, all rose last month, lifting core prices.

Prices for services are rising as the U.S. economy has picked up, and falling unemployment is starting to lift wages, if still only slightly. Higher prices domestically are offsetting cheaper oil and a strong dollar, which is lowering import prices.

Overall consumer prices have slipped 0.1 percent over the past 12 months. It is the first year-over-year 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 Chairman 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.

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.

"There's no pervasive deflation," said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Mass. "The Fed's been right on their call on growth and on inflation. This scenario is playing out pretty much as the Fed's been saying."

More Americans sought unemployment aid last week, though the number of applications was still consistent with steady hiring.

The Labor Department said Thursday that weekly applications rose 31,000 to a seasonally adjusted 313,000, the most in six weeks. The four-week average, a less volatile measure, increased 11,500 to 294,500.

Applications are a proxy for layoffs. The average has been near or below 300,000 since September, a historically low number that suggests companies are holding onto their staffs and may even be stepping up hiring.

"Despite larger-than-expected weekly swings, the trend in claims remains consistent with an improving labor market," Derek Lindsey, an economist at BNP Paribas, said in a note to clients.

Jim O'Sullivan, an economist at High Frequency Economics, said the current four-week average is similar to the average in the final three months of last year. Employers added an average of 324,000 jobs each month in the fourth quarter.

Employers added more than 1 million jobs from November through January, the best three-month pace since 1997.

And more than 3.2 million jobs have been created in the past year. That has helped lower the unemployment rate to 5.7 percent in January from 6.6 percent 12 months earlier.

"The job market is doing well and the increase in initial claims doesn't raise a red flag," said Ryan Sweet, senior economist at Moody's Analytics.

Orders to U.S. factories for long-lasting manufactured goods rebounded in January, rising by the largest amount in six months, although much of the strength came from a big jump in airplane orders. A key category that signals business investment plans did manage a small gain.

Orders for durable goods increased 2.8 percent in January, the biggest increase since July. Orders were down 3.7 percent in December and 2.2 percent in November, the Commerce Department reported Thursday.

Demand in a category that serves as a proxy for business investment increased 0.6 percent in January. It was a small gain but it came after four consecutive declines including decreases of 0.7 percent in December and 0.5 percent in November.

The 2.8 percent rebound in total orders was larger than had been expected but it was heavily influenced by a surge in demand in the volatile category of commercial aircraft, which soared 128.5 percent in January after having fallen 58.3 percent in December.

Excluding transportation, orders showed a more modest gain of 0.3 percent in January after declines in December and November.

Information for this article was contributed by Christopher S. Rugaber and Martin Crutsinger of The Associated Press, Shobhana Chandra of Bloomberg News and Andrew Khouri of the Los Angeles Times.

Business on 02/27/2015

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