Energy Price Drop Erases U.S. Inflation

The biggest drop in energy prices in nearly seven years wiped out U.S. inflation in January.

Consumer prices overall were unchanged, marking the first month without an increase since January 1994, the Labor Department said Tuesday.

“Inflation remains utterly absent,” said economist Bruce Steinberg of Merrill Lynch.

Separately, a New York-based business research group said consumer confidence soared to a three-decade high in February, thanks to Americans’ satisfaction with low unemployment and strong growth. The Conference Board’s index rose to 138.3 in February, its highest level since October 1968, from a revised 128.3 in January. The increase surpassed Wall Street analysts’ expectations for a slight gain.

Tuesday’s inflation report underscores analysts’ belief that Federal Reserve Board policymakers aren’t likely to increase interest rates because there remains little prospect of an inflation breakout.

Fed Chairman Alan Greenspan, delivering his twice-a-year report to Congress, indicated that the central bank is content to leave interest rates unchanged while it waits to see how “storm clouds” from Asia affect the U.S. economy.

The Labor Department said energy costs plunged 2.4% last month, the largest decrease since March 1991. That put them 25% lower than a year earlier and, with crude oil prices still falling, they’ll probably decline further.

Food prices rose a moderate 0.3% for the month, pushed up by a 7.9% increase in fresh vegetables.

Excluding the volatile food and energy categories, prices climbed a modest 0.2%--in line with economists’ expectations.

Tuesday’s report is the first based on an updated market basket of goods and services that the Labor Department says better reflects Americans’ buying habits in the 1990s. Cell phones and home computers, for instance, are much more prevalent than at the time of the last update in 1987. And Americans now eat less beef and more pasta.

Inflation last year was just 1.7%, the mildest rate since the crash of oil prices in 1986, and economists see little reason for the rate to move above 2% this year.

The principal inflation threat comes from services. Their prices may be pushed up by rising wages stemming from shortages of labor.