Despite a flat reading for U.S. consumer prices in April, the annual inflation rate fell with the sharpest decline in 54 years, the government reported on Friday.

The Labor Department said the Consumer Price Index (CPI) remained unchanged in April after decreasing 0.1% in March. However, a reduction in the cost of energy over the past 12 months helped drive the annual rate 0.7% lower, marking the second straight monthly dip and the biggest decline since August 1955.

"The era of U.S. consumer price deflation is now upon us as the ongoing economic recession and deteriorating labor market conditions continue to weaken the bargaining power of retailers and laborers alike, thereby quenching the once raging inflationary flames," Millan Mulraine, economics strategist for TD Securities, was quoted on Forbes.com

There is a debate raging between economists on whether a threat to the approaching economy is rising inflation or spiraling, out of control falling prices, known as deflation.

"It’s impossible to see how deflation can persist given the amount of liquidity in the system," Maxwell Clarke, chief U.S. economist at 4Cast.com in New York, was quoted on Bloomberg Thursday when the government reported an increase in producer prices. "With oil moving back up, the thought in people’s minds becomes that inflation could ultimately become a problem that outweighs deflation."

Federal Reserve Chairman Ben Bernanke believes the danger of deflation is "receding," recently commenting on the Fed’s monetary policy.

"We are currently of course being very aggressive because we are trying to avoid another form of price instability, which is deflation," Bernanke said at a conference in Jekyll Island, Georgia, on May 11. "We are also committed to removing accommodation in a timely way to ensure that, as we come out of this episode and we move to a sustainable recovery, that we will have price stability, low and stable inflation, going forward."

The CPI is a key government gauge for inflation. The core CPI, which excludes volatile food and energy prices, is even more closely watched. It rose by 0.3% in April following three monthly gains of 0.2%. However, 40 percent of the April increase came from a huge 9.3% rise in tobacco prices due to higher federal taxes.

The core CPI is up 1.9% over the past year. That is within the Federal Reserve’s traditional comfort 1%-2% range.

Consumer price details

Rising April prices include:

Tobacco and smoking products rose 9.3% after a 11% jump in March

New vehicles prices rose 0.4 % after a climb of 0.6% March and following a 0.8% increase in February

Medical care rose 0.4% in April after a 0.2% increase in March

Education and communication prices gained 0.3% after 0.2% increases for two straight months

Declining April prices include:

Food and beverage prices fell 0.2% after two straight months of 0.1% declines

Energy costs fell 2.4%. Prices had declined 3.0% in March and rose 3.3% in February

Gasoline prices fell 2.8%. Natural gas prices fell 7%.

Housing prices, which accounts for about 40% of the CPI index, declined 0.1% for the second straight month

Clothing prices dropped 0.2% following the same decline in March and 1.3% surge in February — the biggest increase in nearly 20 years

Airfares declined 1.5% after a 2.3% drop in the prior month

Used car and truck prices fell just 0.1% after two consecutive months of 1.7% declines

In a separate report Thursday, the Labor Department said Producer price rose 0.3% in April. A companion-like report to the CPI, the PPI measures prices at the factory door and inflation pressures before they reach the consumer.

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