The consumer price index was flat in December for the second straight month, the Labor Department said Thursday. Excluding volatile food and energy costs, so-called "core" prices rose 0.1 percent.
Inflation appears to be peaking after rising steeply last year. Prices rose 3 percent in 2011, up from a 1.5 percent pace in 2010 and the most since 2007. But that's down from the 12-month increase of 3.9 percent in September.
Lower inflation gives consumers more spending power, which boosts growth. It also gives the Federal Reserve more leeway to keep interest rates low and take other steps to boost the economy.
In December, consumers benefited from steep discounts retailers made to boost holiday sales. Clothing prices, for example, dipped for only the second time in nine months.
Last year's price increases were from very low levels. Core prices rose 2.2 percent in 2011, up from a record low of 0.8 percent in 2010. Many economists expect that figure to rise modestly over the next few months before leveling off.
Shoppers paid much more at grocery and clothing stores last year. Food prices rose 4.7 percent, the biggest annual increase since 2008. Dairy prices jumped the most, followed by meat, poultry and fish. Fruits and vegetables rose by the smallest amount, 2.3 percent.
Economists expect inflation to decline this year. The prices for oil and many farm commodities, such as corn and wheat, have fallen. That's brought down the price of gas and slowed food inflation.
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.
And while the economy is growing, it is expanding at a sluggish pace. So that keeps a lid on prices. Unemployment is still high and Americans' paychecks aren't rising by much.
Prices at the wholesale level, meanwhile, dipped slightly last month, the department said Wednesday. Food and energy prices both fell, driving the producer price index down 0.1 percent. Excluding food and energy, core prices rose 0.3 percent, as the cost of pickup trucks, cars and pharmaceuticals rose.
The Federal Reserve projects consumer price inflation will fall from about 2.8 percent in 2011 to roughly 1.7 percent this year.
That's in the Fed's preferred range for core inflation of about 1.7 percent to 2 percent.