INSTANT VIEW: Consumer prices fall 0.7 pct in Dec

NEW YORK (Reuters) - Consumer prices fell by a slightly smaller-than-expected margin in December, according to government data on Friday that showed a sagging economy was exerting downward pressure on prices and raising the specter of deflation.

KEY POINTS: * The annual pace of price increases was the slowest in more than 50 years. * The Labor Department said its closely watched Consumer Price Index dropped 0.7 percent after falling 1.7 percent in November -- tumbling for a third straight month. * Analysts polled by Reuters had forecast headline CPI dropping 0.9 percent in December. * Core prices, which exclude food and energy items, were flat for the second month in a row in December. * That compared to analysts' prediction for a 0.1 percent increase. * On a year-over-year basis, consumer prices rose 0.1 percent, braking from a 1.1 percent increase the prior month. It was the weakest reading since CPI fell 0.7 percent in December 1954.

COMMENTS:

MIKE MATERASSO, SENIOR VICE PRESIDENT, CO-CHAIR, FRANKLIN TEMPLETON FIXED INCOME GROUP, NEW YORK:

"The Treasury market had sold off significantly before the CPI number given the reactions to Bank of America and Citigroup

(rescue proposals)...on the equity markets.

"Putting aside overall CPI and looking at core, the trajectory is toward lower rates of inflation and possibly deflation."

KIM RUPERT, MANAGING DIRECTOR, GLOBAL FIXED INCOME ANALYSIS, ACTION ECONOMICS LLC, SAN FRANCISCO:

"We didn't see much of a reaction to CPI data from Treasuries. The data were good news for bonds but now that there are deflation fears, it's difficult to see how that will play out."

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S, NEW YORK:

"Pretty much what we expected. We're seeing this continuing plunge in energy prices... What counts is domestic regenerated inflation, not energy price swings. If you look at the core rate, it was fine. And it's up 1.8 percent over the last 12 months, that's a pretty low inflation rate, but it's not deflation. Frankly, it's right where the Fed wants it.

"I'm getting a little bit worried about it. If the economy's a little bit weaker than we expect, deflation is a possibility, especially given it's not just us, it's the whole world.

"The fact that the core did come down a little bit more than expected, and a lot of that was a big drop in apparel prices, which I think is a reflection of retailer desperation.

"Low inflation is good, deflation is bad. If you can keep that core rate in the 1 percent to 2 percent range, that's where the Fed wants it."

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO, NEW YORK:

"It's not the market mover that it was six or nine months ago, when we were concerned about inflation. The data, the core data, is looked at as being a bit better than expected, but inflation isn't in the thought process anymore. We're probably a little concerned about deflation, but it's too early to worry about that based on this data.

"I think the banks, and the fact that the market was oversold, will play a greater factor than the data today. Also, this time around, unlike this time last November, the idea of being too big to fail is no longer a question mark. The Fed is providing these backstops. I think in November we were all skittish after Lehman. Now we know there's legislation and money to thwart any systemic risk."

RICHARD DEKASER, CHIEF ECONOMIST, NATIONAL CITY BANK, WASHINGTON:

"What is interesting is the core. We have had core deflation over the most recent 3-month period. We are seeing quick pass-through in falling commodity prices or we are seeing a remarkable response to the slack in the economy.

"I wouldn't panic about the risk of deflation, but the widespread decline in prices outside of commodities are surprising and concerning."

JOE MANIMBO, CURRENCY TRADER, RUESCH INTERNATIONAL, WASHINGTON:

"Consumer inflation came out a little softer than expected. That just goes to show that inflationary pressures continue to moderate. At this point, it should underpin risk appetite which could weigh on the dollar. However that being said, we still have more data out this morning and if that disappoints we could see the dollar rebound on safe haven flows."

MARKET REACTION: STOCKS: U.S. equity index futures hold gains after CPI. BONDS: U.S. Treasuries extend losses after data. DOLLAR: U.S. dollar little changed.