Prices Inch Up, But Inflation Tame

Higher costs for medical care, energy products and food pushed consumer prices up by 0.2 percent in December, although overall inflation remained subdued at a time when the economy is gaining momentum.

The mild increase in the Consumer Price Index, the government's most closely watched inflation barometer, comes after prices dipped by 0.2 percent in November, the Labor Department reported Thursday.

For all of 2003, consumer prices rose by 1.9 percent — the smallest advance since 2001 — and down from a 2.4 percent rise in 2002.

Excluding food and energy prices — which tend to be volatile — "core" consumer prices went up by just 1.1 percent last year, the smallest increase since 1960. It was a slowdown compared to the 1.9 percent rise registered in 2002.

That's all good news for consumers. A long bout of lackluster economic activity — which began to turn around in the second half of last year — created a climate that made it difficult for many companies to raise prices and motivated some to cut them to encourage more sales.

In other economic news, sales at the nation's retailers rose by a solid 0.5 percent in December, following a brisk 1.2 percent increase in November, which was stronger than previously estimated, the Commerce Department said.

New claims for unemployment benefits dipped by a seasonally adjusted 11,000 last week to 343,000, the Labor Department said in a second report that suggested companies are feeling more confident the recovery is real and thus are slowing the speed at which they lay off workers.

The four-week moving average of claims, which smooths out weekly fluctuations, dropped last week to 347,500, the lowest level in nearly three years.

The CPI report was on target with economists' expectations. The retail sales report was a bit weaker than forecasts — but November's sales turned out to be stronger than first estimated. The jobless claims figures were better than analysts' predictions.

Federal Reserve Chairman Alan Greenspan this week said he was hopeful the U.S. economy would eventually produce "marked increases in employment" but he didn't elaborate on the timing. The nation's payrolls grew by a minuscule 1,000 jobs in December. Although the jobless rate fell to 5.7 percent, it was because thousands of potential workers gave up looking.

On the nation's pricing climate, Greenspan also this week said that inflation has remained benign even as the dollar has fallen by roughly 25 percent against major foreign currencies since early 2002.

With inflation under control and the fragile labor market still struggling to get back to full health, Fed policy-makers have leeway to hold their main short-term interest rate at 1 percent, a 45-year low, at their next meeting on Jan. 27-28, economists said.

Some economists believe the Fed will keep rates near rockbottom levels through the rest of the year and into 2005. Others, however, believe there's a chance the Fed could begin to nudge rates up later this year, depending on how the economy is doing.

Analysts say a stronger economy and a weaker dollar are beginning to give some companies a little power to raise prices.

In December, medical care costs — a constant sore spot for consumers — rose by 0.6 percent — twice the 0.3 percent increase the month before. For 2003, medical care costs went up 3.7 percent, outpacing overall inflation.

Energy prices rose 0.2 percent in December, compared with a 3 percent drop the previous month, and were up 6.9 percent for all of last year.

Food prices increased 0.6 percent in December, up from a 0.4 percent advance, and rose 3.6 percent last year.