Look for more energy deflation this year

Watch out for falling prices ahead.

The government's latest report on inflation at the producer level showed a huge drop last month, as the plunge in global prices continues to make its way through the cost of everything from gasoline to shipping.

And some forecasters think the full impact of energy deflation has yet to be felt.

"The January numbers show the raw power of energy to influence overall prices," said IHS Global Insight economist Michael Montgomery in a research note.

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Coming months after oil prices began their steep descent to roughly half the level seen last July, the drop in the producer price index was expected. But many economists were surprised by the wider impact of energy costs, which makes up a little more than 6 percent of the widely watched index.

As drivers have witnessed, gasoline prices took another steep plunge—down 24 percent last month. The average cost of a gallon of regular has dropped below $2 in many parts of the country. Other fuels—including heating oil, diesel and propane—also fell.

But the energy windfall spread through the prices of other products, including food. Services prices fell two-tenths of a percent.

The result was a drop of two-tenths in the so-called core rate of producer inflation, which excludes volatile food and energy costs to provide a better read on underlying price pressures. Since last January, the core index was up 1.6 percent. With food and energy taken into account, the index didn't budge.

Most forecasters see the price weakness as a temporary byproduct of the plunge in oil prices. If energy prices stabilize at current, lower levels, the downward pressure on inflation will ease. In the short term, though, the downward pressure on prices will linger as lower energy costs spread through the economy.

"Most of that should be over with by midyear unless oil sags again," said Montgomery. "This is not general deflation in a classical sense."

Read More US wholesale prices drop 0.8 percent in January

Weak prices in other economies—especially Europe and Japan—come as those regions struggle to revive growth. That's sparked concerns about a more persistent price weakness that could make it harder for those economies to regain strength.

But the outlook in the U.S. is considerably stronger.

Solid job gains that began last year are driving down the jobless rate and are putting upward pressure on wages. That added spending power—combined with some savings from lower energy prices—is expected to boost consumer demand, which accounts for some two-thirds of the U.S. economy. Higher employment levels are also expected to help boost the housing market, which has yet to stage a convincing recovery in many parts of the country.

Businesses are also in a better mood, according to recent surveys of both large and small companies, which is expected to continue to drive hiring this year.

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The surprise plunge in oil prices comes as the U.S. Federal Reserve continues to monitor a number of economic cross currents as domestic growth picks up speed. After suppressing interest rates to near zero, the central bank is widely expected to let the cost of borrowing rise later this year. But the timing—based on a mix of jobs data, inflation numbers and the strength of the dollar—complicate when the next policy move will happen.

Some forecasters think the full impact of lower oil prices has yet to be felt. Over the short term, monthly prices at the consumer level could drop by as much as six-tenths of a percent by June, according to Michael Pearce at Capital Economics, before rebounding sharply next year. Pearce figures inflation will top the the Fed's 2 percent target by early next year.