Consumer prices rise 0.2% for 5th straight month

WASHINGTON (MarketWatch) -- With shelter costs dropping sharply, U.S. core consumer prices fell a seasonally adjusted 0.1% in January, the first measurable decline since 1982, the Labor Department estimated Friday.

Core prices, which exclude food and energy costs, are considered a good indicator of underlying inflationary pressures. In January, prices fell for hotel rooms, home ownership costs, new cars, airfares and clothing.

Overall, the consumer price index rose a seasonally adjusted 0.2% in January for the fifth straight month, the Bureau of Labor Statistics said. Higher energy and medical costs more than offset the largest decline in services prices since 1982. Read the full report on the BLS website.

Inflation was weaker than expected by economists surveyed by MarketWatch, who were forecasting a 0.3% increase in the overall CPI and a 0.1% gain in the core CPI. See our complete economic calendar and consensus forecast.

The seasonally adjusted gain in the CPI in December was revised up to 0.2% from 0.1%, because of updated seasonal adjustment factors. The raw or non-seasonally adjusted CPI is never revised.

In the past year, the CPI is up 2.6%, led by higher energy costs. The core CPI is up 1.6% in the past year. Shelter costs, which account for more than 40% of the CPI, are down 0.1% in the past year, largely due to the collapse of the housing market.

"Given the massive amount of slack in the U.S. economy, this first decline in core prices in over a quarter century is probably not the last," wrote Sal Guatieri, an economist for BMO Capital Markets. "While credit markets have improved sufficiently for the Fed to unwind its emergency lending support, the benign inflation picture suggests no reason to tighten policy rates for an "extended period."

Fed officials have reiterated that they believe inflationary pressures will be modest over the next several years because excess capacity in the economy -- including 15 million unemployed workers -- will keep pricing power low.

On Thursday, the Fed repeated that it believed the Fed's target for short-term interest rates should stay extremely low for an extended period of time as the economy begins to heal and job growth slowly resumes. Read our full story on the Fed raising the discount rate for banks.

After the increase in the discount rate, "markets had been anticipating that perhaps the beginning of the Fed's exit strategy might have been accelerated," wrote Michael Hanson, an economist for Bank of America's Merrill Lynch. "This report demonstrates that those fears may be overdone."

The details
The drop in the core CPI in January was mostly due to a 0.5% drop in shelter costs, the largest decline since late 1982. Hotel and motel rates plunged 2.1%. Residential rents were unchanged. Homeownership equivalent rents -- the cost of owning a home -- fell 0.1%.

Meanwhile, energy prices rose 2.8%. Gasoline prices rose 4.4%, and fuel oil prices rose 6.1%.

Food prices increased 0.4%, led by large increases in dairy and fruits and vegetables. Prices of grains and baked goods fell.

With consumer prices rising 0.2% and nominal hourly earnings up 0.2%, real (inflation-adjusted) hourly earnings were unchanged. Over the past six months, real earnings have been essentially unchanged.

Medical costs rose 0.5% in January, the largest increase in two years. Prescription drug prices rose 0.5%.

Apparel costs fell 0.1%. Recreation costs fell 0.1%.

New car prices fell 0.5%, while used car prices rose 1.5%. Airfares fell 2.5%.

Rex Nutting is Washington bureau chief of MarketWatch.