The cost of living in the United States fell in December as the recession deepened, resulting in the smallest annual inflation rate in a half century.

Americans paid 0.1 percent more for goods and services in 2008, the U.S. Labor Department said today. Consumer prices fell 0.7 percent in December after dropping 1.7 percent the prior month. Excluding food and energy, prices were unchanged.

Federal Reserve Bank of San Francisco President Janet Yellen warned yesterday it’s “not acceptable” for policy makers to allow inflation to fall “to levels that are unhealthy.”

“Deflation is on the radar,” said Adam York, an economist at Wachovia Corp. in Charlotte, N.C., which accurately forecast the annual core increase. “There’s just not a lot of fuel for the inflation fire.”

Prices of Treasuries securities, which fell earlier today on concern about the rising cost of government bailouts of financial companies, remained lower after the report.

Consumer prices had been forecast to fall 0.9 percent, according to the median estimate of 80 economists who participated in a Bloomberg News survey.

The core rate, which excludes food and energy prices, increased 1.8 percent last year, the smallest gain since 2003. During the past three months, the rate has fallen at an annual pace of 0.3 percent.

Energy costs dropped 8.3 percent last month and were down 21 percent for the year, the biggest decline since those records began in 1958. Gasoline prices decreased 43 percent in 2008, the biggest decline in records going back to 1937.

Oil prices have fallen further this month. Crude oil futures on the New York Mercantile Exchange fell as low as $33 in intraday trading Thursday after averaging $42.04 in December.