11/16/2011 09:07 EST | Updated 01/16/2012 05:12 EST

Consumers paid less for gas and cars in October, pushing down overall prices

WASHINGTON - Consumers paid less for gas, cars and computers last month, as overall prices dropped for the first time since June. Inflation is easing after prices rose sharply this spring.

The Labor Department said Wednesday that the Consumer Price Index dropped 0.1 per cent in October. A steep drop in gas prices led the decline. Food prices rose, but at the slowest pace this year.

Excluding volatile food and energy costs, so-called "core" prices rose 0.1 per cent. The cost of renting an apartment rose, as did prices for health care products and services.

But new car prices dropped by the most in almost two years, and airline fares and hotel costs declined.

Many economists believe inflation is peaking after climbing steadily this year. Slower inflation could give more momentum to those at the Federal Reserve who believe the central bank should do more to try to lower high unemployment.

A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.

Consumer prices have increased 3.5 per cent in the 12 months ending in October. Core prices have risen 2.1 per cent in that stretch.

Rising oil prices sent the average cost of gas to nearly $4 a gallon in May. The cost of milk, eggs, chicken, and beef rose sharply because of higher prices for corn and other grains used as animal feed.

Higher prices for cotton also drove clothing costs up for four straight months, though prices fell in September. Car prices rose after Japan's March 11 earthquake disrupted supply chains and slowed auto production, which led to a shortage of popular models from Toyota, Honda and other Japanese carmakers.

Slower inflation could boost consumer spending, which accounts for 70 per cent of the economy. The government said Tuesday that retail sales rose 0.5 per cent in October. Americans spent more on trucks, electronics and building supplies. That suggests the economy continued to grow at a modest pace in the October-December quarter.

Still, consumers might not be able to sustain their spending growth if unemployment remains high and pay raises meagre. And Europe may be on the brink of a recession, which could further slow U.S. growth next year.

Federal Reserve policymakers are projecting lower inflation next year. That would give the central bank more latitude to hold down interest rates, and potentially take other steps to stimulate the economy. The Fed has kept the benchmark short-term rate it controls at nearly zero for almost three years. If there were signs that inflation was increasing, the Fed would likely raise rates.

The central bank said two weeks ago that it expects inflation to fall from about 2.8 per cent this year to roughly 1.7 per cent next year. That's in the Fed's preferred range of about 1.7 per cent to 2 per cent.