(Corrects to add dropped figure in paragraph 6; should read $1 trillion; also clarifies lead to show prices unchanged on monthly basis)
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WASHINGTON, May 15 (Reuters) - U.S. consumer prices were unchanged in April from March as expected, but recorded their largest 12-month drop since 1955, government data showed on Friday, as sluggish consumer demand limited companies' pricing power.
The Labor Department said its closely watched Consumer Price Index was flat after falling 0.1 percent in March. Compared to the same period last year, consumer prices fell 0.7 percent, the biggest 12-month decline since June 1955. In March, the year-over-year CPI rate fell 0.4 percent.
U.S. stocks index futures pared losses after the data.
Subdued consumer demand as rising unemployment erodes household incomes and general slack in the economy have robbed companies of pricing power.
"The bears are going to look at this and say we have deflation on the way and a decelerating economy, but I don't think that's the case. I think this will be viewed as a healthy contraction that will lead to a sustainable recovery," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
The Federal Reserve, which has pumped over $1 trillion dollars into the economy in a bid to break its downward spiral, is worried about deflation although it sees the risks as diminishing.
Deflation is a broad-based decline in prices that can undercut an economy by leading consumers to hold off purchases in the hopes of even lower prices.
Core prices, which exclude food and energy items, rose a faster 0.3 percent, driven by a second consecutive large gain in the cost of tobacco as a government excise tax went into effect.
Core prices, which had increased by 0.2 percent in March, were also boosted by increases in medical care and new vehicles in April.
Analysts polled by Reuters had predicted a 0.1 percent increase in core CPI in April. Core prices rose 1.9 percent year over year after a 1.8 percent rise in March.
Energy prices fell 2.4 percent after dropping 3.0 percent the previous month. The food index fell 0.2 percent in April, the largest drop since May 2002 and the third straight monthly decline. (Reporting by Lucia Mutikani, Additional reporting by Ryan Vlastelica in New York, Editing by Andrea Ricci)