Consumer prices rise 2.6%

NEW YORK (CNNMoney.com) -- Consumer prices rose from a year ago amid climbing gasoline prices but the pace of price increases slowed, the government said Friday.

The Consumer Price Index, the government's key inflation reading, rose 2.6% during the past 12 months, according to a report from the Labor Department. In December, prices rose 2.7% from the previous year.

The core CPI, which is more closely watched by economists because it strips out volatile food and energy prices, rose 1.6% over the past year. That's the lowest level since September, when prices rose at a rate of 1.5%.

January: For the month of January, overall prices rose 0.2%. Economists surveyed by Briefing.com had forecast a 0.3% rise.

In a surprise drop, the core CPI fell 0.1% in the month, the largest decline since December 1982. Analysts had expected a 0.1% increase.

The drop came amid falling prices of housing and shelter, which fell 0.5%. The index for lodging away from home fell the most -- 2.1%, while rent prices were unchanged.

The drop in overall core CPI for January was a bit of a fluke because of the volatile lodging prices, said Mark Vitner, an economist at Wells Fargo Securities.

"We're probably seeing a lag response of businesses cutting back on meetings and traveling, and that's weighing on the core CPI," he said. "So the number is a little exaggerated -- we're not going to get declines like this month over month."

Prices of new vehicles and airline fares dropped as well, while medical care prices rose the most since January 2008 and the index for used cars and trucks climbed higher for the sixth-consecutive month.

Overall consumer prices were boosted by rising energy prices. Gasoline prices rose 4.4%, pushing the energy index up 2.8% in January, the ninth-consecutive month of increase.

Fuel oil and natural gas prices rose as well, while electricity prices fell. Higher prices of dairy products and fruits and vegetables boosted the food index up 0.2% in January.

Despite the overall rise in consumer prices, Vitner said inflation is unlikely to become a problem this year as housing costs fall, vehicle prices level off and airline fares drop.

"But that doesn't mean [inflation] won't become a problem in the future," said Vitner. "While I expect continued good news in 2010, some of the factors restraining inflation this year will likely swing the other way in 2011."