Consumer prices tumbled again, deflation concerns grow

Consumer prices tumbled yet again in December, and inflation last year logged its smallest advance since the early 1950s.

The Labor Department's latest inflation report, released Friday, showed consumer prices fell 0.7 percent in December, marking the third straight month prices fell. An 8.3 percent drop in energy prices led the consumer prices fall.

For all of 2008, prices increased just 0.1 percent, the smallest increase in 54 years, since 1954. Although prices spiked during some summer months as oil hit record highs and food prices marched upward, the inflation threat of 2008 ended up fizzling.

Core prices, which exclude food and energy prices, were flat in December for the second straight month, as expected. The core CPI was up 1.8 percent in 2008, the smallest increase since 2003.

Falling prices sound like a gift at first, at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investment and lay off workers.

America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems.