Photo: Revisorweb via Wikimedia Commons

Photo: Revisorweb via Wikimedia Commons

Retail prices fell in January from the month before and from a year earlier, marking the first annual drop in more than five years.

A new U.S. Labor Department report shows the Consumer Price Index declined 0.7% in January from December, the largest drop since December 2008. This follows a 0.3% drop in December and is the third straight decline.

Excluding volatile food and energy prices the “core” CPI gained 0.2% in January.

When January is compared to the same time in 2014, prices fell 0.1%, the first year-over-year decline since October 2009. When food and energy prices are excluded the CPI registered a 1.6% annual increase.

Not surprisingly, the report showed a 9.7% drop in energy prices from month-to-month and a 19.6% drop from a year earlier. The declines were even greater for gasoline alone.

Sterne Agee Chief Economist Linsey Piegza said Federal Reserve policy makers are closely watching inflation and more specifically, core inflation, to determine the underlying trend in prices.

“Policy makers need to be confident inflation is reversing course, back towards their longer term target of 2% before initiating liftoff [in short term interest rates], she said. “While this morning's consumer report does little to exacerbate disinflationary fears, there is also no reason for Federal Reserve Open Market Committee members to feel increasingly confident in a near-term reversal in inflation pressures.”

Meantime, a separate advance report from the Commerce Department shows shipments of factory made durable goods, items designed to last three years or more, fell in January while orders increased.

Shipments posted its third decline out of the past four months, falling 1.1% from December. A drop in transportation shipments led the decline, falling 1.7%, its second one in the past three months.

In contrast, new orders for manufactured durable goods increased 2.8% in January from December, its first gain out of the last three months. It was led by 9.1% hike in transportation orders, following two monthly drops. When transportation orders are excluded from the overall figure, the increase was just 0.3%.

New orders for nondefense capital goods, a sign of increasing business investments, jumped 9.5% in January from December while shipments of them added 1%. Excluding aircraft orders, the overall order increase was 0.6%.

“After months of weakness, business spending appears to be on somewhat firmer footing,” said Piegza. “Although, lower prices and a slowdown in manufacturing activity after quarters of inventory gains are likely to keep business investment under pressure.”