Plunging energy prices cause biggest cost-of-living drop in six years

Plunging energy prices last month led to the biggest decline in the cost of living in six years, keeping inflation well below the Federal Reserve’s target and possibly complicating plans for the central bank to start raising interest rates.

The Consumer Price Index declined 0.4% in December after falling 0.3% the previous month, the Labor Department said Friday

Last month’s drop, which was in line with analysts’ forecasts, was the biggest since the depths of the Great Recession in December 2008.

Falling oil prices were the main factor.

The gasoline price index declined 9.4% in December as the cost of oil worldwide continued its free-fall. Gas prices were down 6.4% in November.

The average nationwide price of a gallon of regular gasoline dropped 49 cents in December to $2.29, according to AAA. And prices have kept falling, signaling another hit to overall inflation this month.

On Friday, a gallon of regular gas was $2.08, AAA said.

“The gasoline plunge was massive in the CPI for the past two months, and is about to upgrade to gargantuan in early 2015,” said Michael Montgomery, U.S. economist for IHS Global Insight.

Overall energy prices were down 4.7% last month, the largest decline since December 2008.

In contrast, food prices rose 0.3% in December, the biggest increase since September, the Labor Department said.

Excluding volatile energy and food costs, prices were unchanged last month -- just the second time since 2010 that the measure did not increase.

Economists say inflation that is too low can be as big a problem as when prices rise too much. So-called deflation has plagued Japan for years and is a major fear in Europe because it can lead business to slow hiring and wage increases.

Consumer prices in the U.S. were up just 0.8% in the 12 months ended in December. That annual inflation rate was down from 1.3% for the 12 months that ended in November.

The Fed wants 2% annual inflation, although it uses a different government measure that has been running lower than the Consumer Price Index.

Chairwoman Janet L. Yellen has said that falling oil prices are a net positive for the U.S. economy. But low inflation could cause Fed policymakers to wait longer to raise their rock-bottom short-term interest rate.

The rate has been near zero percent since late 2008 and Fed officials have indicated the first increase could come in the middle of this year.

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