January Prices See Largest Increase Since July

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January Prices See Largest Increase Since July

WASHINGTON -- Consumer prices rose by 0.3 percent last month, the biggest monthly increase since a 0.7-percent rise in July, The Labor Department reported.

Consumer prices rose modestly in January, propelled by higher energy costs, but most economists and the government believe the recession will keep prices in check this year, according to an Assocated Press report.

That's because even with the January price increase, which was in line with economists' expectations, inflation for the 12 months ending in January was zero. That's the lowest reading since prices actually fell by 0.4 percent for a 12-month period ending in August 1955.

Core inflation, which excludes energy and food, showed a modest increase of 0.2 percent, slightly higher than the 0.1-percent gain economists expected. Over the past 12 months, core inflation rose 1.7 percent, the lowest reading since a similar increase for the 12 months ending in August 2004.

While falling prices appeal to consumers, the Federal Reserve is on alert about the possibility of deflation, which can make a recession even worse by dragging down Americans' wages and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.

The last period of deflation in the U.S. occurred during the Great Depression in the 1930s.

Most economists believe that deflation is a remote threat. However, they have grown more concerned in recent months as the severity of the current recession -- already the longest in a quarter-century -- intensifies.

Energy prices rose 1.7 percent in January, the first increase following five months of big declines. The advance was led by a 6-percent jump in gasoline prices. Even with that gain, prices at the pump are still more than 40 percent below year-ago levels.

Most economists believe consumers will not be battered again this year by soaring energy costs since global demand has fallen sharply in the face of a worldwide recession.

Food costs rose a slight 0.1 percent in January and over the past year increased 5.2 percent. Prices for meat, dairy products, and fruits and vegetables all were lower in January than a month earlier.

The Fed lowered its outlook for the U.S. economy for this year, and while it didn't use the word "deflation," officials noted "some risk of a protracted period of excessively low inflation."

The Fed expects prices to rise between 0.3 and 1 percent this year, down from a projection of between 1.3 and 2 percent in the fall.

Many food and consumer products companies are trying to avoid price cuts despite shrinking consumer spending. Procter & Gamble Co. Chief Executive A.G. Lafley told Wall Street analysts the company hopes its emphasis on value will carry it through the recession.