WASHINGTON, Jan 16 (Reuters) - U.S. consumer prices fell by a slightly smaller-than-expected margin in December, according to government data on Friday that showed a sagging economy was exerting downward pressure on prices and raising the specter of deflation.
The annual pace of price increases was the slowest in more than 50 years. The Labor Department said its closely watched Consumer Price Index dropped 0.7 percent after falling 1.7 percent in November -- tumbling for a third straight month. Analysts polled by Reuters had forecast headline CPI dropping 0.9 percent in December.
Core prices, which exclude food and energy items, were flat for the second month in a row in December. That compared to analysts' prediction for a 0.1 percent increase.
On a year-over-year basis, consumer prices rose 0.1 percent, braking from a 1.1 percent increase the prior month. It was the weakest reading since CPI fell 0.7 percent in December 1954.
Energy prices fell 8.3 percent in December, after declining 17 percent the prior month. Compared to the same period last year, energy prices fell a record 21.3 percent.
(Reporting by Lucia Mutikani, Editing by Andrea Ricci)