America's annual inflation rate all but disappeared last month for the first time in more than 50 years, but consumer prices rose, keeping the United States from deflation. The consumer prices index (CPI) was up 0.3 per cent in January — its first monthly rise since last July and slightly above expectations of a 0.2 per cent increase.

The Bureau of Labour Statistics uses the CPI, which is based on a basket of consumer goods and services, to track changes in prices. CPI is then used to calculate the annual inflation rate. Consumer prices were pushed up last month by a rise in the price of petrol, which was up 6 per cent, against a 19.3 per cent fall in December. The cost of food also rose in January, up 0.1 per cent on December.

Core prices, which strip out food and energy, including fuel, rose 0.2 per cent as retailers and car companies reined in some of the discounts they offered during the Christmas period. Clothes prices were up 0.3 per cent, while new car prices rose 0.2 per cent.

As a result, annual inflation dropped from 0.1 per cent to zero but did not fall into the negative territory of deflation, which occurs when falling prices cause the economy to shrink because consumers put off buying items in the hope of getting them cheaper later.

However, January's figures can be distorted because companies often raise prices at the start of the year. This raises the CPI, giving a warped indication of the direction of prices. Paul Ashworth, a senior economist at Capital Economics, said that despite the CPI rise, he expected inflation to fall to -2.5 per cent by the middle of the year.

Ian Shepherdson, chief US economist at High Frequency Economics, agreed, describing the rise in core CPI as mere “noise”: “Disinflation pressure is still intense and will stay that way for some time.”

The Federal Reserve has two weapons to fight deflation, having dropped interest rates near to zero. On Wednesday it set a tighter inflation target than usual, at 1.7 per cent to 2 per cent. It hopes that a target would help to keep self-fulfilling expectations of deflation at bay. The Fed could also raise the amount of credit in the market.

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