Energy Costs Put Consumer Prices in Reverse, Keep Inflation at Bay

WASHINGTON — U.S. consumer prices fell in December and recorded the smallest annual increase in seven years, reflecting a big drop in energy prices.

Consumer prices slipped 0.1 percent last month after a flat reading in November, the Labor Department reported Wednesday.

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For the entire year, overall inflation was up just 0.7 percent, even smaller than a 0.8 percent rise in 2014. Both years were heavily influenced by plunging energy prices. It was the weakest annual increase since a 0.1 percent rise in 2008.

Core inflation, which excludes volatile energy and food costs, edged up 0.1 percent in December. That was the smallest monthly gain since August. For the full year, core inflation was up 2.1 percent after a 1.6 percent rise in 2014.

Energy prices and a stronger dollar have been major factors holding down overall inflation.

The Federal Reserve last month boosted a key interest rate for the first time in nine years despite muted inflation. The quarter-point increase pushed the federal funds rate from near zero to a range of 0.25 percent to 0.5 percent.

Fed officials have stressed that the pace of future rate increases will be heavily dependent on signs that inflation is beginning to accelerate closer to the Fed's target of 2 percent annual price gains.

However, since the Fed met in December oil prices have declined further. That suggests it might take even longer for the Fed to hit its inflation target.

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But some analysts see the uptick in core inflation as a sign that inflation outside of energy and food is beginning to accelerate. The 2.1 percent rise in the core for the 12 months ending in December followed a 12-month rise of 2 percent in November. It was the largest 12-month gain in core prices since a similar 2.1 percent increase in July 2012.

Driving core inflation in December were increases for shelter costs, medical care, home furnishings and education. Meanwhile, prices for clothing, airline fares and new cars declined in December.

The Fed next meets on Jan. 26-27, and private economists widely believe that the Fed will leave rates unchanged. Some economists say it could be June before the Fed raises rates again.