The US labour department said its consumer price index (CPI) fell by one per cent in October, the biggest drop since the department began releasing data in February 1947 and worse than analysts' expectations.

The record plunge followed little change in prices in September and August and was led by plummeting oil prices from their record highs in July.

However, food prices have continued to climb, up 0.3 per cent in October following a gain of 0.6 per cent in September, pushing the annual rate to 6.1 per cent.

The news also came as the US government said that construction of new homes slumped 4.5 per cent last month to the lowest level since records began in 1959.

The US commerce department said on Wednesday that construction of new homes and apartments dropped to an annual rate of 791,000 units, down from a revised September rate of 828,000 units.

In more bad economic news on Wednesday, the Federal Reserve, the US central bank, offered a bleak outlook for the US economy for 2009, highlighting the potential for recession over the next year.

The latest forecast left a range of possibilities, suggesting the economy could grow as much as 1.1 per cent or contract by 0.2 per cent next year.

Deflation fears

Car makers have blamed a slump in sales
on the global financial crisis [EPA]
While lower prices may benefit US consumers, analysts warn they can hurt corporate profits.

In addition, lower prices also raise the threat of deflation, a prolonged bout of falling prices that has not been experienced in the US since the Great Depression in the 1930s.

The US congress also heard a second day of testimony from the leaders of the so-called Big Three car makers, General Motors, Ford and Chrysler.

The companies' executives appeared before the US senate banking committee on Tuesday to request a portion of the $700bn financial bailout agreed by US politicians last month.

US Democrats have been pushing for funding from the bailout to be granted to the auto industry, but so far Republicans in congress and White House officials have resisted the calls.

Al Jazeera's John Terrett in Detroit, the home of the US car industry, said it was unlikely that a deal would be done before Barack Obama, the US president-elect, takes office on January 20.