Energy costs drive US inflation

Alan Greenspan will discuss inflation at his last Fed meeting

Wholesale prices in the US rose at their fastest rate in 15 years during 2005, as the effects of soaring energy prices took their toll.

The Labor Department producer price index (PPI) rose 5.4% in 2005, driven by a 23.9% hike in energy costs.

For December, the PPI - which gauges price changes before they reach the customer - rose 0.9%, the biggest jump since September's 1.7%.

Oil prices rose in 2005 on increased demand and hurricanes hitting output.

Production for many US companies was hit in Gulf Coast after Hurricane Katrina put a number of refineries out of action in late summer.

Expensive vegetables

Food costs moved up by nearly 1% in December, following a 0.5% November gain.

Within the food figures vegetable soared 22% during the month, the biggest gain in more than a year.

Inflation is looking more benign outside of the energy sector Lara Rhame, Credit Suisse

Overall, core producer costs, which exclude volatile energy and food prices, were up by the more tepid figure of 1.7% in 2005, with just a 0.1% increase in December.

Following the inflation report the dollar dipped, while US shares and bonds reacted positively to the news.

Retail sales failed to take off in the US during December

In other economic news released on Friday, retail sales rose 0.7% in December, compared to 0.8% the previous month, and reflecting a patchy Christmas sales period.

Another disappointing aspect of the figures was that retail sales were up just 0.2% when automobile purchases were taken out.

Lara Rhame of Credit Suisse in New York said: "Retail sales growth was a little weaker than markets had expected, with a downward revision to the ex-auto sector."

She added: "Inflation is looking more benign outside of the energy sector."

'Recovery in prices'

Nevertheless, the PPI increase may entice the Federal Reserve to continue with its strategy of gradually increasing interest rates to make sure that energy price pressures to not infect other parts of the economy with inflationary trends.

The Fed will decide whether to boost the main interest rate for a 14th time when officials meet on 31 January, Alan Greenspan's last meeting as chairman.

"With the focus on the Federal Reserve, the PPI is probably more important to the market," said Gary Thayer, chief economist at AG Edwards in St. Louis.

"We did see a big recovery in prices, but that was primarily in energy. Core prices increased only modestly and that's good news for the Fed."