Consumer Price Index Down 0.1 Percent

A sharp drop in energy prices pulled U.S. consumer prices (search) down 0.1 percent last month, but underlying inflation continued a steady advance, according to a government report on Wednesday that could bolster expectations for a steady diet of interest-rate rises.

Excluding volatile food and energy costs, the Consumer Price Index (search), a widely used inflation gauge, rose 0.2 percent, the Labor Department (search) said.

The rise in the core index matched expectations in financial markets, which had expected overall prices to hold steady.

The drop in the overall CPI reflected a 1.8 percent slide in energy costs. Fuel oil prices dropped 4.8 percent and the cost of gasoline fell 3.7 percent. Natural gas prices, however, built on earlier increases by climbing 1.0 percent.

Food prices were unchanged, the department said.

For the year as a whole, consumer prices advanced 3.3 percent as energy costs surged 16.6 percent, their biggest rise since an oil-induced spike in 1990. Core prices, in contrast, advanced at a more-moderate 2.2 percent. Nevertheless, the core price gain was the biggest since 2001 and marked a doubling from the pace in 2003.

Federal Reserve officials have raised overnight borrowing costs by a quarter-percentage point at each of their last five policy meetings, bringing them to 2.25 percent from a 1958 low of 1 percent.

Policymakers, who next gather in early February, have said they should be able to continue to push rates up at a "measured pace" and head off any troublesome inflationary pressures.