The latest release of the U.S. Consumer Price Index suggests that inflation is hardly a worry, giving Fed chief Alan Greenspan room to trim U.S. interest rates further.

The December CPI report came in down 0.2% on the headline, up just 0.1% on the core rate. The slide was greater than expected. “The headline price decline was driven by a not-surprising 3.2% drop in energy prices,” says CIBC World Markets. “Weaker crude oil markets and natural gas prices pressured by warm weather and weak industrial activity have been passed through to consumer costs for fuel.”

Although CIBC notes that the market’s focus remains on core inflation. “Typically, declines in food and energy prices pull core inflation down with a lag, with energy cost declines and global economic softness gradually working their way into other consumer prices that are set less frequently. This year should be no exception, with core gradually working its way down to 2% or less by year-end,” CIBC suggests.

BMO Nesbitt Burns agrees, noting, “We believe very good inflation news lies ahead. This will keep the markets from getting too frantic about Fed tightening in the second half of 2002. It will also contribute to stable or declining bond yields. Those low yields will provide support for the equity market as the fledgling profits rebound tries to take flight around mid-year. Low inflation is likely to prove the cornerstone of the coming economic expansion.”

CIBC sees more monetary loosening before the tightening begins anew, noting that the prospect of weakening core inflation, “gives Alan Greenspan an open door to cut interest rates another quarter point at the January FOMC.”