NEW YORK - January 17, 2009 - A destructive combination of deflation and plummeting output loomed over the United States yesterday after another double dose of grim economic news.

A plunge in the American headine inflation rate to lows of virtually zero not seen for more than half a century and the sharpest annual slump in production at factories for 33 years fuelled fears of a vicious recession.

Anxieties over the latest severe blows to U.S. prospects came as concerns over the depth of the recession facing other leading economies were stoked by more evidence from Europe that world trade is rapidly collapsing. But it was the latest bleak developments in the world's biggest economy that set the loudest alarm bells ringing in financial markets.

The threat that the U.S. economy will slide into the grip of full-blown, Thirties-style deflation was underlined by yesterday's stark inflation figures. A further sharp 0.7 per cent drop in consumer prices during last month drove the headline inflation rate down to just 0.1 per cent, the weakest reading since December 1954.

For now, America remains some way from full-blown deflation, however, as so-called “core” inflation - stripping out the impact of tumbling fuel prices as well as the cost of food - remains markedly higher. Last month's core inflation rate eased to 1.8 per cent. This was still the smallest pace of increase in core consumer prices since 2003.

Fears that deflationary pressures will continue to tighten their grip were heightened by other dire industrial news as output from U.S. factories last month sank by a steeper than forecast 2 per cent. The latest decline by industry capped a dismal year and left output down by 7.8 per cent from a year earlier, in the biggest annual fall since September 1975.