* U.S. consumer prices eased dramatically in December, down 0.7% M/M, bringing the annual rate of inflation to 0.1% Y/Y.

* Core prices were flat on the month, with the annual rate of core consumer inflation falling to 1.8% Y/Y.

* Prices were weaker across the board, with the decline in gasoline prices leading the way.

U.S. consumer prices declined for the fifth consecutive month in December, falling by a dramatic 0.7% M/M in December. The drop in December comes on the heels of the 1.9% M/M drop in November and the 1.0% M/M drop in October. The decline was slightly less than the 0.9% M/M fall expected by the markets. On a year ago basis, consumer prices are up a meagre 0.1% Y/Y, which is a significant drop from the 1.1% Y/Y gain posted in November. This is the lowest annual print on U.S. consumer price inflation since the mid-1950s.

Core inflation was also quite weak. In fact, consumer prices excluding food and energy were unchanged on the month, with the annual pace of core price inflation falling from 2.0% Y/Y in November to 1.8% Y/Y In December, which is the lowest level of price inflation since 2004.

Prices were weak across most categories with the 17.2% M/M drop in gasoline prices (the third consecutive double-digit monthly drop in this component) leading the way. There were also fair-sized decline in the price of apparel (down 0.9% MM), motor vehicles (down 0.4% M/M) and personal computers (down 0.5% M/M). Goods prices were 2.0% M/M lower, while the cost of services rose by a modest 0.1% M/M.

The crux of this report is simply that the once pervasive consumer price pressures have all virtually dissipated, on account of the growing economic slack and plunging commodity prices and the dominant concern for the Fed is fast becoming consumer price deflation. Moreover, with the economic slack continuing to grow and gasoline prices likely to ease further there is a nontrivial risk that prices will ease even further, taking U.S. consumer prices in deflationary territory – even if only for a few months.