Consumer prices fall on plunging gas costs

In California, gas prices exploded to a record high average of $4.61 dollars a gallon -- up 47 cents -- making it the most expensive gas in the country. John Blackstone reports.

WASHINGTON A steep fall in gas costs pushed down a measure of U.S. consumer prices last month, keeping inflation mild.

The seasonally adjusted consumer price index dropped 0.3 percent in November from October, the Labor Department said Friday. Gas prices fell 7.4 percent, the steepest drop in nearly four years. That offset a 0.2 percent rise in food prices.

In the past year, consumer prices have risen 1.8 percent, down from October's 12-month increase of 2.2 percent.

Excluding volatile food and gas, prices ticked up 0.1 percent in November and have risen 1.9 percent in the past year. Higher rents, airline fares and new cars pushed up core prices. The cost of clothing and used cars fell.

"If you take energy prices and elevated food inflation fears out of the picture, consumer prices look relatively tame," said Chris Christopher, senior principal economist with IHS Insight, in a research note. "On the food front, the producer price increases over the past few months are far greater by order of magnitude than price increases on the consumer side. However, it is clear the consumer food price increases will be realized in the near term."

High unemployment and slow wage growth have made businesses reluctant to raise prices. Many worry higher prices could drive away customers. That's helped keep inflation mild.

Modest inflation leaves consumers with more money to spend, which can boost economic growth. Lower inflation also makes it easier for the Fed to continue with its efforts to rekindle the economy. If the Fed were worried that prices are rising too fast, it might have to raise interest rates.

The increase in food prices was smaller than many economists expected. This summer's drought in the Midwest, which scorched corn and soybean crops, has pushed up food prices. But the increase hasn't been dramatic so far. Food costs have risen 1.8 percent in the past 12 months.

Some items have seen big increases. The cost of milk, cheese and other dairy products have risen 0.8 percent in each of the past two months. That could reflect the higher cost of animal feed, which usually includes corn and soybeans. Cereals and baked goods rose 0.3 percent last month. But prices for the broad category of meat, chicken, fish and eggs fell in November, after a big gain the previous month.

The Fed said Wednesday that it now plans to keep the short-term interest rate it controls at nearly zero until the unemployment rate falls to at least 6.5 percent and inflation isn't expected to top 2.5 percent in the next two years.

It was the clearest sign yet that they will keep rates super-low even after unemployment falls further and the economy picks up.

Unemployment was 7.7 percent last month and the Fed projects it will stay above 6.5 percent until late 2015. The Fed also projects inflation will stay at or below 2 percent for the next three years.

The Fed also said it would continue purchasing $85 billion in Treasury bonds and mortgage-backed securities each month in an effort to push down longer-term interest rates.

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