Consumer prices in October registered their largest decline in 61 years, signaling that inflation is among the least of the problems facing a U.S. economy wracked by credit concerns, mounting unemployment and consumers who are holding on to their cash.

The Labor Department yesterday said prices fell 1 percent in October, led by an 8.6 percent drop in energy prices, including a 14.2 percent tumble in gasoline prices.

"Consumer price inflation has suddenly screeched into reverse," said IHS Global Insight economist Brian Bethune.

He said gasoline fell about 90 cents a gallon last month to $2.87 a gallon.

Excluding food and energy, consumer prices fell 0.1 percent in October, the first such monthly decline since December 1982.

Costs for new and used cars and apparel also fell. Prices for food, medical care, tobacco and alcoholic beverages rose, while housing costs were unchanged.

October's decline was about double what economists had forecast and followed a negligible change in September. It left consumer prices 3.7 percent above year-ago levels.

Mr. Bethune forecast another sharp decline in consumer prices for the current month. With inflation out of the picture, the Federal Reserve has more latitude to lower interest rates again to combat the recession, he said.

Minutes of the Fed's meeting last month that were released yesterday indicate that board members have sharply lowered their economic forecasts and are ready to cut rates again if needed. The Fed now believes the country's gross domestic product will grow no more than 0.3 percent this year and could remain flat. The Fed's forecast for 2009 GDP ranged from a decline of 0.2 percent to growth of 1.1 percent vs. the growth of 2 to 2.8 percent it forecast in June.

By eliminating inflation as a major risk and highlighting deflation -- a sustained drop in prices -- as a threat, "the Fed is essentially giving itself carte blanche to move ahead full bore using all the tools and facilities at its disposal," Mr. Bethune said.

Argus Research economist Richard Yamarone sees no risk of deflation and said inflation remains a threat. He called the 1 percent drop in prices last month "a correction from prices that should have never been where they were over the summer, particularly energy." His concern is that the $700 billion stimulus package approved by Congress and other measures taken to ease the credit crisis could reignite inflation in mid-2009.

"There's an inordinate amount of stimulus the Fed has pumped in and it's just waiting to come out," he said. "You're going to see some serious inflation pressures."

Separately, the Commerce Department yesterday reported that housing starts fell 4.5 percent in October to the lowest level since the agency began tracking the data in 1947.

"The 14.5 percent drop in single-family permits was unexpected and indicates that the residential construction industry will take a big hit from the financial problems that erupted in September," said IHS Global Insight economist Patrick Newport.

Wall Street reacted to the economic news with the Dow Jones industrial average falling below the 8,000 mark to 7,997.28, its lowest level since March 2003.