December wholesale prices edge up 0.2 percent

WASHINGTON -- Inflation pressures at the wholesale level eased in December as a drop in energy prices offset a big jump in food costs.

The Labor Department said Wednesday that wholesale prices edged up 0.2 percent last month, much slower than the 1.8 percent surge in November. Energy prices, which had been up for two months, fell in December.

The price performance at the wholesale level combined with last week's benign reading on consumer prices supported the view that inflation is not a problem.

That gives the Federal Reserve room to keep interest rates low to boost the country out of a deep recession.

Meanwhile, the Commerce Department reported that construction of new homes and apartments fell 4 percent in December to a seasonally adjusted annual rate of 557,000 units as bad weather hit much of the country.

But applications for new housing projects shot up 11 percent to an annual rate of 653,000, a better-than-expected performance indicating that builders are ready to ramp up production in 2010.

The 0.2 percent overall increase in wholesale prices was slightly higher than the flat reading economists had expected while the unchanged reading on core prices was lower than the 0.1 percent advance analysts had forecast.

Energy costs fell by 0.4 percent in December as the price of gasoline dropped by 3.2 percent, the biggest one-month decline since September. Natural gas prices fell by 1.9 percent, the biggest decline since last May.

Food costs rose by 1.4 percent, the third straight month of higher food costs. The December jump was led by a 9.4 percent rise in pork prices, the biggest increase in a decade, and a 3.7 percent increase in the cost of dairy products, the largest advance in more than two years.

The rise in food costs accounted for one-fifth of December's overall 0.2 percent rise in wholesale inflation.

The flat reading for core prices, which excludes food and energy, was helped by a 1.2 percent fall in the cost of light trucks, a category that includes sport utility vehicles.

For the 12 months ending in December, prices at the wholesale level were up 4.4 percent compared to a 0.9 percent drop in wholesale prices in 2008. That big swing reflected a rise in energy costs in 2009.

Core inflation at the wholesale level was much better behaved last year, rising by 0.9 percent after having surged by 4.5 percent in 2008.

Last Friday, the government reported that consumer prices edged up a slight 0.1 percent in December with core prices up the same amount. That finished off a year in which consumer prices rose by 2.7 percent, reflecting higher energy costs during the year. Excluding food and energy, core consumer prices were up 1.8 percent, matching the rise in 2008.

Many economists are looking for inflation pressures to moderate even more in 2010 as the worst recession since the 1930s keeps exerting downward pressure on prices.

The low inflation has allowed Federal Reserve officials to push a key interest rate to its lowest level on record. The Fed's target for banks' overnight lending rate has been at 0 to 0.25 percent for more than a year now. Many analysts believe the Fed will keep rates low for much of 2010 because of their belief that the economy will not be growing fast enough to keep the unemployment rate from rising.

The jobless rate currently stands at 10 percent and many forecasters believe it will keep climbing and hit 10.5 percent by the middle of this year before starting to decline.