US consumer prices recorded their biggest decline in six years in December and a gauge of underlying inflation failed to rise, which could make the Federal Reserve more cautious about raising interest rates.

Other data yesterday, however, suggested the economy was still poised for solid growth despite the soft inflation readings, with factory output rising last month and consumer sentiment hitting its highest level in 11 years in January.

The Labour Department said yesterday its Consumer Price Index (CPI) fell 0.4 per cent last month, the largest drop since December 2008, after sliding 0.3 per cent in November.

In the 12 months through December, CPI increased just 0.8 per cent, the weakest reading since October 2009, and a sharp deceleration from November's 1.3 per cent rise.

'It seems nearly certain that further declines in headline inflation rates will be seen in coming months' due to fast-falling energy prices, said Dan Greenhaus, chief strategist at BTIG in New York.

'What is important, though, is that core inflation rates are not necessarily immune to declines in oil and petrol,' he said.

While Fed officials have viewed the energy-driven drop in inflation as transitory, a strong dollar is taming underlying price pressures, which could cause some discomfort for policymakers who had been looking to mid-year to raise rates.

The so-called core CPI, which strips out food and energy costs, was unchanged in December. It was only the second time since 2010 that it did not increase.

In the 12 months through December, the core CPI rose 1.6 per cent, the smallest gain since February.

Despite a strengthening labour market and economy, inflation does not look like it will reach the US central bank's 2 per cent target anytime soon. Indeed, some economists think it could dip into negative territory this year before rebounding.

The softness in core inflation, however, along with darkening prospects for the global economy is likely more troubling for the Fed, which will have to weigh the inflation weakness against others signs of economic strength

The 11-year high in consumer sentiment in January reported by the University of Michigan reflected gains in both employment and income, and the boost to spending power from sharply falling petrol prices.-Reuters