Consumer price index jumps on costlier gas

WASHINGTON - Consumer prices rose last month as the cost of gas increased by the largest amount since June 2009. But outside of energy costs, there was little sign of widespread inflation.

The Labor Department said Friday the Consumer Price Index rose 0.5 percent in December, the largest increase in 18 months. About 80 percent of the increase was due to an 8.5 percent rise in the gasoline index, also the sharpest increase in 18 months. Food prices ticked up 0.1 percent in December.

High unemployment and a weak economy are keeping prices in check. Retailers and manufacturers are reluctant, for now, to pass on the rising costs of raw materials to consumers, for fear of scaring them away.

"Although growth appears to be picking up, there is still very little reason to be concerned about rising prices," said Jim Baird, an economist at Plante Moran Financial Advisors.

Last year, the consumer price index rose by only 1.5 percent, down from 2.7 percent in 2009.

Excluding the volatile food and energy categories, the so-called core index moved up 0.1 percent in December for the second straight month. In the past year, the core index rose by only 0.8 percent.

That's near a record low of 0.6 percent set earlier in 2010 and the smallest December-to-December increase in the history of the index, which dates to 1958.

Low prices may be encouraging shoppers to spend more. Retail sales rose for a sixth consecutive month in December, the Commerce Department said Friday, helped by big gains in sales of autos and furniture. The increases helped lift sales activity for the year by the largest amount in more than a decade.

The string of increases pushed sales for all of 2010 up by 6.7 percent, the largest annual increase since 1999.

Inflation could tick up later this year as prices for commodities such as oil, grains and cotton have risen sharply in recent months. Grain prices hit a 2 1/2 year high earlier this week after the government said corn, wheat and soybean harvests would come in below previous estimates. Oil prices have risen due to strong demand in large, fast-growing developing countries.

Companies could be forced to pass on some of the higher raw material costs to consumers. But so far, there is only limited evidence that is occurring.

On Thursday, the government said food prices at the wholesale level rose by 0.8 percent last month, after a 1 percent jump in November. But the price of food on supermarket shelves moved up only 0.1 percent. Economists say it can take 6 months to a year for price increases at the wholesale level to affect the consumer index.

The Federal Reserve said in a survey released Wednesday that "competitive pressures" had limited the ability of companies to pass on higher prices.

Fed Chairman Ben Bernanke told Congress last week he expected inflation in the United States will "likely to be subdued for some time."

The Federal Reserve would like to see prices rise a bit faster than they are now. Its preferred range for the core consumer index is roughly 1.5 percent to 2 percent. Figures below that carry the threat of deflation, a widespread and prolonged downturn in prices, wages and home values.

The central bank launched a program late last year to buy $600 billion in government bonds, in an effort to stimulate the economy, bring down high unemployment and prevent deflation. Some economists worry the purchases could lead to inflation, but most analysts expect the Fed to complete the program on schedule in June.

Fears of deflation arose last summer, after consumer prices dipped for three straight months. But the they have risen for six straight months since then.