Consumer price drop is biggest since '55

NEW YORK (CNNMoney.com) -- A key index of prices paid by consumers fell at the sharpest rate since August 1955 due to historically low energy prices, the government said Friday.

The Labor Department said the Consumer Price Index declined 0.7% on an annual basis in April, only the second year-over-year decline in nearly 54 years following March's 0.4% drop.

On a monthly basis, consumer prices were unchanged, in line with the consensus estimate of economists surveyed by Briefing.com.

The overall index was affected by a sharp decline in energy prices, which fell 2.4% in April, and are down 25.2% on an annual basis.

Oil prices averaged about $50 a barrel in April, down 55% from an average of about $112 a barre in April of 2008.

"When oil prices go up to near $150 and then fall sharply, your going to have an impact on CPI," said Bob Brusca, an economist at FAO Economics in New York.

While oil prices have trended higher recently as investors respond to signs of economic stabilization, there's no reason to think inflation will rebound anytime soon given the near-term outlook, Brusca said.

"There's a lot of slack in the economy, and so there's not much reason to fear inflation," he said.

Meanwhile, prices excluding food and energy, the so-called core CPI, rose 0.3% in April, after a 0.2% rise the month before. Economists were expecting a 0.2% gain. Core consumer prices were up 1.9% on an annual basis.

The increase in core CPI was due to a 9.3% rise in prices for tobacco and smoking products, which jumped 11% in March. Retailers have boosted tobacco prices in response to a federal tax hike that went into effect April 1.

Excluding tobacco prices, core inflation rose 0.2% in April, according to Aaron Smith, senior economist at Moody's Economy.com.

"There has been some genuine acceleration in core prices and that should put to rest fears of near term tilt into deflation," Smith said.

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.

At the same time, Smith said the weak economy will keep "disinflationary force" on CPI for at least another year, "since slack does indeed matter."