Fuel prices hit US consumer costs

US drivers saw a big rise in petrol prices in 2005

US consumer prices rose by the highest rate for five years in 2005 after a surge in energy costs, said a closely watched report by the Labor Department.

Its Consumer Price Index was up 3.4% for the whole of last year, equalling the increase seen in 2000.

The rise was led by a big jump in global oil prices having a knock-on effect on US petrol costs.

Stripping out volatile energy and food costs, the core inflation rate posted a 2.2% rise in 2005, unchanged from 2004.

Supply pressures

For December alone, the Consumer Price Index fell 0.1%, thanks to energy prices cooling towards the end of the year.

Overall a great inflation report Analyst Ned Riley

The core inflation rate for December was an expected 0.2% rise.

Global energy prices, and most notably oil, rose sharply last year because of a number of supply and demand problems.

Firstly, Iraq's continuing lack of security reduced its oil exports while global demand soared, led by fast-growing China and the US.

Oil supplies were further cut by a number of hurricanes in the Gulf of Mexico in August and September.

Rates speculation

Since June 2004, the US Federal Reserve has voted to raise interest rates by a quarter of a percentage point 13 times in a row, to the current 4.25% level, in an effort to curb inflationary pressures as the US economy has grown.

Since the latest figures from the Labor Department show no rise in core annual inflation, the Fed could now choose to keep rates on hold after its next meeting at the end of January.

Some analysts even predict the Fed could start to lower interest rates as 2006 progresses.

"Overall, a great inflation report," said US analyst Ned Riley. "This again confirms interest rates should be declining over the next six months and should send the message to the Fed that it need not worry about long-term inflation."

The Federal Reserve said on Wednesday that US economic activity rose across the country in the last several weeks of 2005, but rising energy costs worried businesses.