Gas, food get blame for surging inflation

WASHINGTON – Consumer prices rose in 2007 at the fastest pace in 17 years as motorists paid a lot more for gasoline and grocery shoppers paid higher food bills. However, prices fell or clothing and cars.

The Labor Department reported consumer prices rose by 4.1 percent for 2007, up sharply from a 2.5 percent increase in 2006. Both energy and food prices jumped by the largest amount since 1990.

Prices also were up sharply for health care, housing and education. However, these gains were offset somewhat by falling prices for clothing, new cars and computers.

Workers’ wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the fourth decline in the past five years. The lagging wage gains are cited as a chief reason many workers have growing anxiety about their economic futures.

Core inflation, which excludes both energy and food, rose 2.4 percent last year, slightly lower than the 2.6 percent increase of 2006. It is the performance of core inflation that the Fed closely monitors.

Analysts said the slight drop in core inflation for 2007 plus various reports showing the economy is in the grips of a serious slowdown will convince the central bank that a key interest rate it controls should be reduced by a bold half-point when Fed officials next meet on Jan. 30-31.

“Price pressures may be a little greater than the Fed would like but with the economy hitting the skids, inflation is not so high to stand in the way of aggressive action,” predicted Joel Naroff, chief economist at Naroff Economic Advisers.

Providing further evidence of a slowing economy, the Fed reported Wednesday that output at the nation’s factories was flat in December, the worst showing since an outright decline of 0.5 percent in October. Economists said that poor reading confirmed their view that the manufacturing sector has slipped into a recession.

The December weakness in industrial production reflected flat output at U.S. factories. For the year, output at auto plants fell by 4.1 percent as Detroit continues to struggle with falling demand in the face of soaring gasoline prices. Industries connected to the troubled housing sector including wood products and furniture also suffered big declines for the year.

For December, the Consumer Price Index rose by 0.3 percent, slower than the 0.8 percent jump in November, as food costs were flat for the month and energy prices rose by 0.9 percent after an even bigger 5.7 percent jump in November. Outside of food and energy, core inflation rose a more moderate 0.2 percent in December.

The 4.1 percent increase in overall prices last year was the biggest since a 6.1 percent jump in prices in 1990.

Overall energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent.

Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.