Inflation eases, creates space for Fed stimulus

A woman carries shopping bags at South Park mall in Charlotte, North Carolina November 25, 2011.

WASHINGTON (Reuters) - Consumer prices were flat in November as Americans paid less for cars and gasoline, a further sign of a cooldown in inflation that could give the Federal Reserve more room to help a still weak economy.

The Labor Department said on Friday the Consumer Price Index was unchanged last month. Economists had expected an increase of 0.1 percent.

Prices spiked earlier in the year, but the report showed the trend has shifted. Over the past 12 months, prices have risen 3.4 percent. That marked a second monthly decline from a three-year high in September.

The report "leaves the Fed ample cover for any additional monetary policy accommodation they may see warranted in the New Year," said Ian Lyngen, a bond strategist at CRT Capital Group in Stamford, Connecticut.

Still, some of the data could give pause to policymakers at the central bank.

Outside food and energy, prices climbed a faster-than-expected 0.2 percent. These so-called core prices rose 2.2 percent in the 12 months through November, up from 2.1 percent in October.

"Core inflation ... is a bit more persistent than what some people had expected," said Jeremy Lawson, an economist at BNP Paribas in New York.

Economists polled by Reuters this week saw inflation slowing to 2.6 percent during the first quarter of next year, which could help convince the Fed to do more to bring down the country's 8.6 percent unemployment rate.

Prices for U.S. government debt rose slightly on Friday as investors saw the data opening the door a bit wider to Fed stimulus. U.S. stocks rose and the dollar fell against the euro as investors remained on edge over the euro zone's debt crisis.

The U.S. recovery has picked up momentum over the past few months, but the Fed on Tuesday warned about turmoil in financial markets abroad and it kept the option of further monetary action on the table.

FED EASE STILL IN PLAY

In an appearance before Congress on Friday, New York Federal Reserve Bank President William Dudley warned that a worsening of Europe's sovereign debt crisis could hit U.S. banks, potentially tightening credit for households and businesses.

"Europe's problems are a serious risk for the U.S. economic outlook," he said.

In recent months, cooling gasoline prices have left more money for consumers to spend on other things, helping the economy gain some steam. In November alone, gasoline prices fell 2.4 percent.

The effects of Japan's earthquake disaster in March, which disrupted global supply chains and pushed auto prices higher earlier in the year, are also subsiding. Prices for new vehicles fell 0.3 percent in November.

Prices for food rose 0.1 percent. Within the core index, prices for apparel jumped 0.6 percent , but the increase in the department's main gauge of homeownership costs cooled to 0.1 percent from 0.2 percent in October.

Many economists have said the Fed might try to give the economy a bit of help at a meeting on January 24-25 by laying out forecasts for interest rates that could underscore its willingness to keep borrowing costs ultra-low for a prolonged period.

The U.S. central bank has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related bonds in a further attempt to stimulate a robust recovery.

Fed watchers also think the U.S. central bank could step up bond buying later in 2012. A Reuters poll on Tuesday found most Wall Street economists think the central bank will undertake a new program of buying mortgage-backed securities.

(Additional reporting by Chris Reese and Richard Leong in New York; Editing by Neil Stempleman, Andrew Hay; and Jan Paschal)