Consumer prices in 1st annual drop since '55

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NEW YORK (CNNMoney.com) -- A key index of prices paid by consumers fell in March and registered its first annual decline in more than 50 years, the government said Wednesday, as prices for energy and food slumped in the weak economy.

But core inflation, which excludes volatile food and energy costs, was slightly higher - with no indication of deflation.

The Consumer Price Index, the Labor Department's key measure of inflation, declined 0.1% in March, after climbing 0.4% the previous month. Economists surveyed by Briefing.com had forecast a 0.1% rise in the latest reading.

The overall index is down 0.4% since March 2008, which is the first 12-month decline since August 1955, the government said.

However, that annual decline is largely a reflection of the steep drop in gasoline prices that occurred over the last year, according to Stuart Hoffman, chief economist at PNC Financial Services.

Gas prices averaged about $3.24 a gallon in March 2008, according to figures from the American Automobile Association. That compares with an average price of $1.96 per gallon in March 2009.

"That's not deflation," Hoffman said. "That's the benefit of lower energy prices continuing to feed through to the economy."

Deflation, a widespread drop in prices, is a sign of economic weakness. Lowering prices is one way businesses can cope with falling demand. But if companies can't earn a profit selling their products at lower prices, they could be forced to cut production or lay off workers, which speeds up the pace of economic deterioration.

Energy prices fell 3% last month, after increasing 3.3% in the prior month. Food prices declined 0.1% in March.

But prices excluding food and energy rose 0.2% in March after a 0.2% rise the month before. Economists were expecting a 0.1% gain. Core CPI has risen 1.8% over the past year.

The increase in core CPI was due mostly to an 11% rise in prices for tobacco and smoking products. Many retailers increased tobacco prices in March ahead of a federal tax hike that went into effect April 1.

The government said Tuesday that its Producer Price Index, a measure of prices paid at the wholesale level, fell more than expected last month. PPI declined 1.2% in March after a 0.1% increase the month before.