Consumer prices fall by 0.2 percent in December

Associated Press WriterWASHINGTON (AP) -- Consumer prices edged down by 0.2 percent in December, capping a year in which inflation was at its lowest since 1998, the government reported Wednesday.

The Labor Department's Consumer Price Index, a closely watched inflation gauge, rose by just 1.6 percent for all of 2001. That compared with a 3.4 percent jump in 2000, which largely reflected rocketing energy prices.

A dramatic drop in energy prices -- reflecting weak demand amid a worldwide economic slump -- was a key force behind the significantly lower inflation reading for 2001.

The 1.6 percent increase marked the best showing on inflation since 1998, when the CPI rose by the same amount.

In another report, industrial production at the nation's factories, mines and utilities declined by only 0.1 percent in December, after a steep 0.4 percent drop the month before, the Federal Reserve said.

The manufacturing sector has been hardest hit by the economic slump. To cope, manufacturers have cut production and let workers go. For the year, industrial production fell by 3.9 percent, the first annual decline since 1991, when the country was suffering through its last recession. In 2000, industrial production rose 4.5 percent.

One of the few benefits of the slowed economy to consumers is low inflation. Companies, facing sagging demand, have heavily discounted merchandise and offered free financing and other incentives to lure customers.

In a third report, businesses reduced their inventories of unsold goods by 1 percent in November even as sales fell by 1.4 percent, the Commerce Department said. The report shows that businesses continued to make progress whittling excess supplies, which economists said is necessary to set the stage for increasing production.

The Federal Reserve cut interest rates 11 times last years in an effort to revive the economy, which sank into recession in March. The Fed has been able to act so aggressively because inflation has been low and hasn't posed a risk to the economy.

The 0.2 percent December decline in consumer prices, largely because of plunging energy prices, came after prices were flat in November.

Energy prices fell by 3.2 percent in December and plunged by 13 percent for all of 2001, the largest annual decline since 1986.

Fuel oil prices plummeted by 26.7 percent last year. Natural gas prices dropped by a record 15.1 percent last year and gasoline prices went down by 24.9 percent. Electricity prices, however, rose by 6.1 percent last year, the largest annual increase since 1982.

Food prices, meanwhile, dipped by 0.1 percent in December for the second month in a row. For all of last year, food prices rose by 2.8 percent.

Excluding volatile energy and food prices, the "core" rate of inflation edged up by 0.1 percent in December, down from a 0.4 percent advance in November. For 2001, the core inflation rate rose by 2.7 percent, slightly faster than the 2.6 percent rise registered in 2000.

Elsewhere in the report, clothing prices fell by 3.2 percent in 2001, reflecting discounting by retailers. That was the largest annual decline since 1949. Airfares dropped by 3.9 percent last year, the best showing since 1994.

But prices for medical care last year rose by 4.7 percent, the biggest annual increase since 1994.