Energy costs push US inflation up

Consumer prices rose 0.5% in December, slightly above analysts' expectations.

The Federal Reserve raised rates in 2006 to curb inflation but, despite lower oil prices, are still worried about inflationary pressures.

Analysts said data showing a large fall in those claiming unemployment benefit indicated the labour market was tight.

Energy factor

In its latest economic analysis, the Fed said the economy grew "modestly" in the past two months.

Compared to December 2005, inflation rose 2.5% last month, up from the 2% rise seen in November.

The jump in inflation was caused primarily by rising energy prices, which shot up 4.6% last month - the sharpest rise in nearly a year.

Average gasoline prices rose in December, although the sharp fall in oil prices in recent months means that this increase could be short-lived.

But excluding energy and food prices, inflation rose 0.2% after remaining flat the previous month.

The figures, allied to recent data showing a rise in producer prices and industrial production, suggest the economy remains resilient despite concerns about a slowdown in the housing market.

The number of housing starts - privately-owned homes being built - fell 18% during 2006 compared to a year earlier. But, analysts did suggest the market may be stabilising as the number of new construction starts rose in November and December.

Spare capacity

With the number of people claiming unemployment benefit in December falling by 8,000 to its lowest level in 11 months, analysts say there is little spare capacity in the economy, potentially forcing prices up.

This, in turn, could influence Fed members when they meet later this month to decide on interest rates.

"The idea that the Fed will be moving on rates any time soon is not going to be happening because the inflation numbers are still going to be uncomfortable," said Nigel Gault, director of US research at economists Global Insight.

Despite December's rise, 2006 saw the smallest annual rise in prices - of 2.6% - since 2001.

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