Lower gasoline prices dampen U.S. consumer inflation

(Adds details, updates market)

* Consumer prices fall 0.7 percent in January

* Consumer price index dips 0.1 percent from a year ago

* Core CPI rises 0.2 percent; up 1.6 percent from a year ago

* Core capital goods orders rise 0.6 percent in January

By Lucia Mutikani

WASHINGTON, Feb 26 (Reuters) - U.S. consumer prices fell over the past year for the first time since 2009 as gasoline prices continued to tumble, which could allow a cautious Federal Reserve more room to hold off on raising interest rates.

Other data on Thursday showed a rebound in business investment spending plans and a steadily firming labor market, suggesting the move into deflation territory would be brief. In addition, gasoline prices have been rising in recent weeks.

"We believe the Fed will wait until September before achieving liftoff on interest rates and, even then, the process of normalization will move at a glacial pace," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

The Labor Department said its Consumer Price Index fell 0.1 percent in the 12 months through January, the first decline since October 2009 and a sharp deceleration from December's 0.8 percent rise.

The CPI dropped 0.7 percent from December, the largest fall in six years, after slipping 0.3 percent in the prior month.

The dollar was unfazed by the weak inflation backdrop, rising more than one percent against a basket of currencies, while poor demand at a monthly note auction undercut prices for U.S. Treasuries. Stocks on Wall Street fell.

Fed officials, who have long viewed the energy-driven drop in inflation as transitory, could take comfort from a rise in underlying price pressures last month.

The U.S. central bank has a 2 percent inflation target and tracks a price measure that is running even lower than the CPI (Other OTC: CPICQ - news) .

Fed Chair Janet Yellen told lawmakers this week that the central bank's policy-setting committee "needs to be reasonably confident that over the medium-term inflation will move up toward its 2-percent objective" before it starts to raise interest rates.

The so-called core CPI, which strips out food and energy costs, rose 0.2 percent last month after December's 0.1 percent gain. Economists, however, believe the effects of lower energy prices and a strong dollar still have to work their way through to the core CPI, which could mean tame readings ahead.

"It will be some time before the Fed gets the necessary confirmation that inflation will move back to target in the medium term," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The core CPI was lifted by increases in the cost of shelter, recreation and apparel prices. In the 12 months through January, the core CPI rose 1.6 percent after a similar gain in December.

OIL GLUT

Softer global demand and increased shale oil production in the United States have caused an oil glut, causing crude prices to plummet.

Domestic gasoline prices plunged 18.7 percent in January, the biggest drop since December 2008, after falling 9.2 percent in the prior month. Gasoline prices have now declined for seven straight months.

Separately, the Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending intentions, increased 0.6 percent last month after a revised 0.7 percent fall in December.

The increase followed four straight months of decline.

"Companies are laying in supplies to meet the demand from consumers down the road, so this is a positive for the outlook," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

"The economy looks on solid footing to start the year, with orders picking up and yes, there is some inflation out there."

Business investment has been hurt by a softening global economy, as well as the strong dollar, which has dented the overseas profits of some companies. Lower crude oil prices are also undercutting demand for equipment in the oil field.

Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product measurement, fell 0.3 percent last month after rising 0.3 percent in December.

Business spending was a drag on growth in the fourth quarter, holding the economy to a 2.6 percent annualized growth pace. First (Other OTC: FSTC - news) -quarter growth is currently forecast at around a 2.3 percent rate.

Another report from the Labor Department showed initial claims for state unemployment benefits increased 31,000 to a seasonally adjusted 313,000 in the week ended Feb. 21.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 11,500 to 294,500 last week.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci)