Overall prices in the US economy registered their first year-on-year fall for more than half a century today, fuelling fears that the American economic slump could tip the world's biggest economy into a destructive bout of Japanese-style deflation.

US consumer prices fell by 0.1 per cent last month, leaving them down by 0.4 per cent compared with their level a year before, as plummeting consumer demand in America and worldwide drove steep falls in the cost of food and energy. It was the first time that US headline inflation has recorded a negative annual rate since 1955.

America's slide into deflationary territory was propelled by a 3 per cent fall in energy costs last month and aggravated by a 0.2 per cent monthly fall in the cost of clothing, while airfares plunged by 2.3 per cent.

The figures fulfilled widespread prediction on Wall Street that the US economy would experience a period of deflation this year.

But coming just a day after President Obama trumpeted "glimmers of hope" for a US recovery, and was joined by Ben Bernanke, Chairman of the Federal Reserve, in talking up US prospects, the news nevertheless dealt a blow to hopes that America could be on course for economic revival by the end of the year.

Deflationary forces in the US are mounting as slumping demand and soaring unemployment leave a growing overhang of unused capacity and labour. The impact in stoking competition will put further heavy downward pressure on prices.

At the same time, national US industrial production figures showed that output from America's factories, mines and utilities fell by a further 1.5 per cent last month, to stand 12.8 per cent down from a year before, emphasising that the signs of the economic slump easing off remain only very tentative.

However, fears of full-blown deflation of the destructive variety that laid low the Japanese economy for more than a decade were eased by other factors that helped to keep so-called "core" inflation, excluding the volatile cost of food and energy, markedly above the headline rate.

The annual rate of core inflation for last month remained at 1.8 per cent, although economists warned that it is still set to slide further in coming months as the longest US recession since the Great Depression, which has already lasted for 17 months, drags on.

The bad news on deflation was also tempered by upbeat results in the latest snapshot of manufacturing in the New York State area in the regular Empire State survey. This showed a marked rebound in conditions. The survey's general business conditions index rose to minus 14.65 in April, from minus 38.23 in March.

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