U.S. consumer prices were flat in September, the latest sign that falling energy prices and the economic downturn are easing pressure on inflation south of the border.

The consumer price index was unchanged in September, the U.S. Labor Department said today. It fell in August for the first time in almost two years. Excluding food and energy, the CPI advanced 0.1% last month. Both figures were 0.1 percentage point below analyst forecasts.

Consumer prices rose 4.9% on a year-over-year basis, down from August and now well off the 17-year high of 5.6% reached in July. The core CPI grew a more modest 2.5% compared to September 2007, though that’s still well above the U.S. Federal Reserve’s long-term goal of 1.5% to 2%.

The headline inflation rate is likely to keep falling, and slip below 4% by year’s end, according to economists at both CIBC World Markets and BMO Capital Markets.

“There are still some underlying price pressures in the US economy that have not yet made their way to the consumer level, but these forces should be overpowered by much larger macro economic forces,” said Meny Grauman in a CIBC World Markets report.

BMO Capital Markets’ Michael Gregory expects the slide in headline inflation to continue into next year, falling below 2% during the second half of 2009.

According to today’s report, energy prices tumbled 1.9% last month, the second-straight decline. Gasoline prices slipped 0.6%, and natural gas prices tumbled 8.3%.

Housing, which accounts for 40% of the CPI index, fell 0.1% for a second-straight month, the first back-to-back decline since 2001.

In contrast, food and beverage prices rose 0.6%.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, were unchanged in September as incomes struggle to keep pace with inflation.

The U.S. Labour Dept. also reported that initial claims for jobless benefits fell 16,000 on a seasonally-adjusted basis to 461,000 in the week ended Oct. 11. Economists had expected claims would fall by 13,000.

Industrial output falls

Meanwhile, U.S. industrial production decreased 2.8% in September, following an upwardly revised 1.0% drop in August, the Federal Reserve said today.. Previously, August output was seen falling 1.1%.

Capacity utilization decreased to 76.4% in September. August capacity use was 78.7%, which was unrevised. The 1972-2007 average is 81.0%.

The 2.8% drop was the largest since 3.5% in December 1974.

“Hurricanes Gustav and Ike and a strike at a major producer of civilian aircraft severely curtailed output,” the Fed said. Boeing machinists went on strike last month.

Economists expected industrial production to drop 0.8%, with a capacity utilization rate of 78.0% for the month.

“The weakness in today’s report buttresses the view that the U.S. economy is on a downward trajectory,” wrote Josh Heller, RBC Economics Research economist, in a note. “In response, we expect the Fed to cut the Fed funds rate by 50 bps bringing it to 1% by the end of this year.”

IE