Higher Fuel Costs Blamed For Producer-Price Inflation

Best Buy and other retailers' sales rose less than expected in December but could rebound in January as people redeem gift cards.
Best Buy and other retailers' sales rose less than expected in December but could rebound in January as people redeem gift cards. (By Mike Mergen -- Bloomberg News)
By Martin Crutsinger
Associated Press
Saturday, January 14, 2006

Gasoline costs pushed producer prices up sharply in December, ending a year in which they rose at the fastest pace since 1990.

The Labor Department reported that its Producer Price Index, which measures price pressures before they reach the consumer, rose 0.9 percent in December. The culprit was a big surge in gasoline prices, which rose 12.3 percent after falling 10.7 percent in November.

For all of 2005, producer prices rose by 5.4 percent, compared with a 4.1 percent increase in 2004. Both gains were the biggest since a 5.7 percent rise in 1990, a year when Iraq's invasion of Kuwait sent global energy prices soaring.

However, core inflation, excluding energy and food, was up a more moderate 1.7 percent in 2005, including a tiny 0.1 percent increase in December.

In other economic news, the Commerce Department reported that retail sales posted a weaker-than-expected 0.7 percent increase in December after rising by 0.8 percent in November.

Excluding autos, consumer spending at retail stores was up an even more modest 0.2 percent after a decline of 0.4 percent in November.

Those figures were seen as further evidence that retailers had a fairly lackluster holiday sales season. But analysts expressed the hope that January sales will rebound as consumers use the gift cards they got for Christmas. Those cards are not counted as retail sales until they are redeemed.

"Retailers continue to report good sales momentum in the post-holiday period, bolstered by gift card redemptions," said Michelle Girard, a senior economist at RBS Greenwich Capital.

In a third report, the Commerce Department said that inventories held by businesses on shelves and backlots rose by 0.5 percent in November, slightly better than the 0.4 percent increase that Wall Street was expecting. Economists believe that a rebound in depleted business inventories in the closing months of 2005 will help support overall economic growth as the growth in consumer spending cools off.

The 0.9 percent increase in producer prices in December followed a 0.7 percent drop in prices in November. Economists had been expecting a rebound last month but the increase was more than double the 0.4 percent rise in the PPI they had been predicting.

The increase was expected to keep the Federal Reserve on a path of gradually moving interest rates higher to make sure that energy price pressures do not spill over into more broad-based inflation problems.

The 0.7 percent increase for retail sales in December was below the 1 percent increase that many economists were expecting. Auto sales were up 2.6 percent after an even stronger 5.7 percent increase in November, finishing a year in which sales in this category surged in the summer because of attractive discounts, but then slumped in the early fall.

Demand was flat at specialty clothing stores and fell by 0.3 percent at department stores and other general merchandise stores.

Energy costs were up 3.1 percent in December, with the gain led by the biggest one-month jump in gasoline prices since a 12.7 percent increase in September.

Residential natural gas prices fell by 2.7 percent last month although analysts are warning that consumers are going to be hit by considerably higher home heating bills this winter, reflecting higher costs than a year ago for natural gas and home heating oil.

Food costs rose by 0.9 percent in December. Vegetable prices were up 21.7 percent, reflecting higher costs for cauliflower, lettuce, eggplant, broccoli and tomatoes. Beef prices were up 2.4 percent but the price of processed chickens fell by 4 percent.

Outside of food and energy, the 0.1 percent increase in the core inflation rate reflected a decline of 1 percent in light truck prices and a 0.2 percent fall in the price of new cars. The price of communication equipment was up 0.6 percent, the biggest rise since March 2003, while pharmacy products rose by 0.6 percent.

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