Inflation Eased In 2006

After two years of being battered by soaring energy costs, Americans got a bit of a reprieve in 2006, which helped restrain overall inflation to the lowest increase in three years.

The Labor Department reported Thursday that consumer prices rose by 2.5 percent in 2006, the best showing since prices had increased by just 1.9 percent in 2003. The improvement came in spite of the fact that consumer prices jumped 0.5 percent in December, as gasoline prices staged a momentary rebound.

The slowdown in inflation translated into more spending power for Americans. The government said average weekly earnings for non-supervisory workers rose by 2.1 percent last year, after adjusting for inflation. That was the biggest gain in nine years.

Inflation-adjusted weekly earnings had fallen for three straight years, a development that Democrats argued in last fall's election campaigns showed that President Bush's economic policies were not working for the middle class.

In other economic news, the number of newly laid off workers filing claims for unemployment benefits fell to a seasonally adjusted 290,000 last week, the lowest level in 11 months and an indication that the labor market began the new year in good shape in spite of weakness in housing and auto manufacturing.

Meanwhile, the Commerce Department reported that construction of new homes rose by 4.5 percent in December to a seasonally adjusted annual rate of 1.642 million units, raising hopes that the worst of the housing slowdown may be coming to an end.

However, analysts cautioned that the figure was heavily influenced by warmer-than-normal weather last month.

The 0.5 percent December increase in consumer prices had been expected, given that gasoline costs rebounded during the month. However with crude oil prices setting 19-month lows in recent weeks, the expectation is that gasoline costs will resume their downward trend and stay well below the record level of over $3 per gallon, set last summer.

For all of 2006, energy costs rose 2.9 percent, a significant slowdown after an increase of 17.1 percent in 2005 and 16.6 percent in 2004. That price moderation occurred in recent months. After advancing at a 22.8 percent annual rate in the first six months of 2006, energy costs fell at a 13.4 percent rate in the final half of the year.

The moderation in energy in the second half of last year helped lower the overall price increase to 2.5 percent, down from a gain of 3.4 percent in 2005, which had been the biggest price jump in five years.

Core inflation, which excludes volatile energy and food costs, rose by 2.6 percent in 2006, up from gains of 2.2 percent in both 2004 and 2005. That was the fastest increase since a 2.7 percent rise in 2001.

The Federal Reserve has been watching the performance of core inflation closely for signs that the surge in energy costs in recent years was breaking out to more widespread inflation troubles.

In an effort to prevent that from occurring, the Fed raised interest rates at 17 consecutive meetings as a way of slowing overall growth enough to keep inflation under control.

Analysts believe the central bank could start cutting interest rates by this summer if core inflation continues to show improvement.

The report on the Consumer Price Index offered good news on that front, showing that core inflation was rising at an annual rate of 1.4 percent in the final three months of the year, just half of the 2.8 percent rate of increase turned in during the July-September quarter. It was the best showing of the year.