The Consumer Price Index, the main U.S. inflation gauge, fell 0.2 percent last month, the Labor Department reported. Excluding the volatile food and energy components, the so-called core CPI increased 0.1 percent.
During all of 2001, the CPI was up only 1.6 percent, the smallest gain since a matching 1.6 percent rise in 1998.
A dramatic drop in energy prices reflecting weak demand amid a worldwide economic slump was a key force behind the significantly lower inflation reading for 2001.
The Beige Book survey, prepared for the next policy-setting session, notes economic activity "generally remained weak from late November through early January." It also notes scattered reports of improvement.
It says many districts "indicate their contacts believe a recovery will begin by mid-year or earlier," but notes the timing and strength of the recovery are uncertain.
The Fed has cut interest rates 11 times last years in an effort to revive the economy, which sank into recession in March. The central bank has been able to act so aggressively because inflation has been low and hasn't posed a risk to the economy.
The inflation report showed that energy prices fell by 3.2 percent in December and plunged by 13 percent for all of 2001, the largest annual decline since 1986.
Fuel oil prices plummeted by 26.7 percent last year. Natural gas prices dropped by a record 15.1 percent last year and gasoline prices went down by 24.9 percent. Electricity prices, however, rose by 6.1 percent last year, he largest annual increase since 1982.
Food prices, meanwhile, dipped by 0.1 percent in December for the second month in a row. For all of last year, food prices rose by 2.8 percent.
Excluding volatile energy and food prices, the "core" rate of inflation edged up by 0.1 percent in December, down from a 0.4 percent advance in November. For 2001, the core inflation rate rose by 2.7 percent, slightly faster than the 2.6 percent rise registered in 2000.
Elsewhere in the report, clothing prices fell by 3.2 percent in 2001, reflecting discounting by retailers. That was the largest annual decline since 1949. Airfares dropped by 3.9 percent last year, the best showing since 1994.
But prices for medical care last year rose by 4.7 percent, the biggest annual increase since 1994.
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