Core inflation slows in November but no deflation

WASHINGTON (Reuters) - A important measure of inflation fell to its lowest level in more than four years last month, data on Wednesday showed, but economists still don't expect the trend to translate into Japan-style deflation.

Growth in the core price index for personal consumption expenditures, which strips out volatile food and energy prices, slowed to 1.9 percent in November compared to a year ago from 2.0 percent the month before, the Commerce Department said.

This is the lowest reading since March 2004, when the United States was rebounding after a deflation scare, and represents a half percentage point drop from the recent peak of 2.4 percent hit in July.

The rapid decline places the index securely within the 1 percent to 2 percent "comfort zone" of Federal Reserve policy-makers, who watch the index closely for signals on the inflation trend.

Deflation can be hard to stop once it builds momentum, but economists said there were enough prices still moving higher to make it a remote risk for the time being.

"We're unlikely to see this pace of deceleration continue over the next few months, so I don't think we're going to be pushing 1 percent by mid-year," said Dean Maki, co-chief U.S. economist at Barclays Capital in New York.

Deflation, defined as a broad and sustained decline in general price levels, can harm an economy by encouraging consumers to postpone spending because they think prices will fall in the future, depressing demand.

"In the current environment that seems unlikely because you are seeing so many prices continuing to rise, even on a month on month basis," said Maki.

Japan suffered from a decade of deflationary stagnation in the 1990s, which only ended when the central bank used unconventional policy tools to quantitatively ease monetary conditions by driving up bank reserves.

The Fed has already deployed its own version of unconventional easing measures by pumping over $1 trillion into credit markets with the aim of driving down private sector borrowing costs to stimulate spending and investment.

The Fed dramatically lowered interest rates to almost zero last week in order to preserve price stability and has said that it thinks the risks of deflation are not large at this point, but remain on its radar screen.

"Policy-makers are probably more focused on the risk that the rate passes through the band to the lower side over the near-term, given the continued downtrend underway in commodity prices," said Mike Englund, chief economist at Action Economics, referring to the Fed's perceived inflation comfort zone.

"Our assumption at this point is a reduction in the core pace to the middle of the comfort zone by mid-2009, with the path from there dependent on the magnitude and duration of the current U.S. and global cyclical downturn," he said.

(Reporting by Alister Bull; Editing by Leslie Adler)