Wholesale inflation rises at fastest pace in 15 years

WASHINGTON -- Soaring energy prices pushed wholesale inflation up in 2005 by the highest amount since 1990. Meanwhile, retail sales rose by a moderate 0.7 percent in December with almost all of the strength coming from higher car sales.

The Labor Department reported that wholesale prices rose by a bigger-than-expected 0.9 percent in December, closing out a year when wholesale prices rose by 5.4 percent, the biggest advance since a 5.7 percent jump in 1990.

However, core inflation, which excludes energy and food, was much better behaved, rising by a tiny 0.1 percent in December and just 1.7 percent for the entire year, even better than the 2.3 percent increase in core prices in 2004.

Energy prices shot up 3.1 percent as gasoline prices skyrocketed by 12.3 percent last month. That was close to the 12.7 percent surge in September, when widespread production shutdowns at Gulf Coast refineries saw gasoline rise briefly above $3 per gallon.

While the tame core inflation number showed surging energy has not translated into higher overall prices, analysts said it will keep the Federal Reserve on guard and will likely translate into two more quarter-point rate increases at the Fed's Jan. 31 and March 28 meetings.

"This alerts us to the fact that we still have to deal with the issue of a possible spillover of high energy prices into core inflation," said Lyle Gramley, a former Fed governor. "It hasn't happened yet, but there is a potential problem."

On Wall Street, the Dow Jones industrial average lost 2.49 points to close at 10,959.87. The Dow hit a 4 1/2-year high of 11,043.44 on Wednesday.

Analysts said the weaker-than-expected increase in retail sales last month provided evidence that the economy is slowing, which should help dampen future inflation.

Many economists believe overall growth in the final three months of 2005 slowed to a rate of 3 percent or less, compared with the 4.1 percent growth in the third quarter of last year, as debt-burdened consumers cut back on spending.

December's 0.7 percent rise in retail sales followed a 0.8 percent November increase, but both months were heavily influenced by auto sales.

Outside of autos, December sales rose by just 0.2 percent. November sales fell by 0.4 percent when autos were excluded.

Sales were down by 0.3 percent at department and other general merchandise stores in December and were flat at specialty clothing stores.

Even electronics stores, which supposedly enjoyed a boom in sales of high-tech games and music players for Christmas, saw a drop of 0.1 percent last month.

"Perhaps Santa's sleigh was a bit lighter than we thought," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

Sales were up 2.6 percent at car dealerships after a 5.7 percent jump in November car sales. But automakers had to return to sales incentives to boost demand after big sales declines in the early fall.

Excluding both cars and gas station sales, which largely reflected higher prices, retail sales would have risen only 0.1 percent in December.

"If you take out gas and cars, sales were basically flat," said David Wyss, chief economist at Standard & Poor's in New York. "Consumers are getting more cautious."

Wyss said he was predicting that the economy in 2006 will grow by around 3.5 percent, basically unchanged from the expected growth rate in 2005.

But he said rather than consumers and housing providing much of the momentum, the strength was likely to come from increased business capital spending, reflecting in part hurricane reconstruction efforts, and an improving trade performance.

In addition to energy, food prices were also up sharply in December, rising by 0.9 percent, while a drop in car prices helped to hold down core inflation.

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On the Net:

Wholesale inflation: http://www.bls.gov/ppi

Retail sales: http://www.census.gov/retail