Associated Press WriterWASHINGTON (AP) -- Wholesale prices, led by a sharp drop in energy costs, fell by 0.7 percent in December, helping to make 2001 the tamest year for inflation at the producer level since 1986.
The Labor Department's producer price index, which measures price pressures before they reach consumers, fell by 1.8 percent for all of last year, the biggest annual decline 1986, when wholesale prices dropped by 2.3 percent, the government reported Friday.
That marked a big improvement from the 3.6 percent increase in wholesale prices registered in 2000.
One of the few benefits of the slowed economy is low inflation. Companies, facing sagging demand, have heavily discounted merchandise and offered free financing and other incentives to lure customers.
The Federal Reserve cut interest rates 11 times last year in an effort to revive the economy, which sank into recession in March. The Fed has been able to act so aggressively because inflation has been low and hasn't posed a risk to the economy.
Excluding volatile energy and food prices, the "core" rate of inflation edged down by 0.1 percent in December, following a 0.2 percent increase in November. For all of 2001, the core rate rose by just 0.7 percent, well under the 1.3 percent increase in 2000.
The 0.7 percent drop in overall wholesale prices in December was the third decline in three months. Wholesale prices dropped by an even bigger 1.6 percent in October and by 0.6 percent in November.
While many other prices have been well-controlled, a dramatic drop in energy prices was a key reason wholesale inflation was so low last year.
In December, energy prices dropped by 4 percent, helping to push them down by 17.2 percent for all of 2001. In 1999 and 2000, energy prices rose by double digits -- by 18.1 percent and 16.6 percent, respectively.
Gasoline prices last month fell by 8.2 percent. Heating-oil prices dropped by 14.2 percent. Diesel fuel prices declined by 19.5 percent, the sharpest decline since February 1990, and residential natural gas prices were down by 2 percent.
According to the Lundberg Survey of about 8,000 stations nationwide, gasoline prices in late December fell an average of 3 cents a gallon nationwide to $1.12 a gallon, the lowest level in nearly three years.
But some analysts say pump prices could bottom out as early as January as retailers try to halt sliding profits, oil prices continue to rise and major oil-producing nation's implement an expected production cut.
Food prices, meanwhile, dipped by 0.1 percent in December, following a 0.8 percent decline. For all of 2001, food prices rose by 1.8 percent, only a slight deterioration from the 1.7 percent rise in 2000.
Elsewhere in the report, car prices fell by 0.7 percent and truck prices dropped by 1.5 percent in December, as companies offered free financing and other incentives to move autos off the lots.
Clothing prices edged down by 0.2 percent last month as retailers discounted merchandise to bolster sagging sales.