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Consumer Prices Dampen Inflation Fears

January's CPI rose by a lower-than-expected 0.2% and core CPI fell 0.1%, dampening inflation fears stoked by the Fed's move late Thursday to raise the discount rate.

WASHINGTON (

TheStreet

) -- Energy costs drove consumer prices higher in January, but at a slower-than-expected rate, easing concerns about inflation stoked by a surprise hike in the

Federal Reserve's

discount rate.

The consumer price index, which tracks the price of goods and services purchased by consumers and is considered an important inflation gauge, increased 0.2% in January after a similar rise in December. Economists had been expecting a 0.3% rise.

Energy, particularly gasoline, saw the biggest cost increases with energy prices gaining 2.8% last month. Food prices, meanwhile, inched 0.2% higher.

Core CPI, which excludes food and energy costs and is therefore considered the best gauge of underlying inflation, fell 0.1% in January, after rising 0.1% in December. The Labor Department said price declines on housing, cars and airline flights contributed to the month's drop in core prices.

The mild CPI reading likely came as a welcome surprise to the market after Thursday's

producer price index for January surged by a higher-than-expected 1.4%.

There was also some speculation that the Fed's decision to raise the

discount rate may have been timed to precede an unexpected spike in the consumer price index.

"I think that CPI did come as a surprise, especially given where PPI was Thursday, which came in with a lot of inflationary undertones and that's what really freaked the market out with the Fed discount rate decision," said Burt White, chief investment officer for LPL Financial.

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"Although the change has very little overall economic impact, I think what the market put together is that the Fed saw signs of rising inflation and is now getting ready to raise interest rates," White said. "The low CPI number is what really snapped the market back into understanding that the Fed isn't going to tighten unless two things are present: job creation and rising inflation."

White pointed to yesterday's

weak initial jobless claims data and today's low CPI figures as indications that that neither will happen in the near term.

"This tightening is going to be a process -- not an event, as it has been in the past."

Stock futures pared their losses but still pointed to a lower open after the data's release.

U.S. indices were trading mildly lower 0.3% lower early Friday, with the

Dow Jones Industrial Average

down by 34 points to 10,359. The

S&P

was down by 3 points to 1103 and the

Nasdaq

was off by 7 points, to 2234.

-- Written by Melinda Peer in New York

.