US retail prices grew at their slowest "core" rate since the l960s, as the miracle of high growth and low inflation continues to surprise economists and policy makers.

The core rate, which excludes volatile food and energy prices, was up just 1.9% in the twelve months to December, the best figure since 1965, when it was 1.5%.

The overall rate of inflation was 2.7%, as high oil prices pushed up the index slightly from last year's figure.

Energy prices were up by 13.4%, the biggest increase since the Gulf War in 1990, as OPEC producers succeeded in reducing output.

And the rate of inflation appears, if anything, to be slowing down, with consumer prices rising just 0.2% in December - less than expected.

Nor is there more inflation in the pipeline, with core producer prices - the cost of raw materials - was even lower at 0.1%.

Rate rise on the cards

Despite the low inflation, the US central bank, the Federal Reserve, is widely expected to raise interest rates at its next meeting on 1 and 2 February.

Chairman Alan Greenspan has warned that the extraordinary growth in productivity of the US economy cannot go on for ever, He says that the 'wealth effect', which leads people to consume more when their stocks go up, is boosting growth too much.

The Fed raised rates three times last year. These rate increases have so far not cooled the economy. And the stock market has gone on to record levels as well.

Economy still ticking along

Meanwhile, industrial output rose 0.4% in December, right on target with many analysts' expectations, indicating that the economy is headed into 2000 on solid footing. Operating capacity was 81.3%, well below levels associated with a pickup in inflation.

But retail sales in December were up a robust 1.2% in December, as retailers had a good Christmas.

The US economy as a whole was growing at an annual rate of nearly 6% in the third quarter of 1999, far higher than the 3% most economists believe is sustainable in the long run.

Nevertheless the stock market surged on the news of the low inflation figures, which were better than expected.