Economy grew in Dec. as prices started to ease

WASHINGTON - Wholesale prices moderated in December while industrial production rebounded - just the results the Federal Reserve is hoping to achieve to keep the economic expansion on track.

The Federal Reserve reported yesterday that industrial production rose 0.4 percent last month after two months of 0.1 percent declines. The increase reflected higher output at factories.

Meanwhile, the Labor Department said its Producer Price Index rose 0.9 percent in December. That was down sharply from a 2 percent jump in November.

The combination of a growing economy and moderating inflation is what the Fed has been hoping to achieve with its two-year campaign of raising interest rates to slow growth enough to keep inflation at bay.

For the whole year, wholesale prices were up 1.1 percent, sharply less than the 5.4 percent surge in 2005, reflecting a slowdown in energy costs. The Producer Price Index is the gauge of wholesale prices, before goods reach the consumer.

Wholesale gasoline prices surged to record levels above $3 a gallon last summer, but energy prices have since eased, and that helped to cap inflation in 2006. Energy costs were down 2 percent last year after having soared 23.9 percent in 2005.

The 0.4 percent rise in industrial production reflected a 0.7 percent advance in output at the nation's factories and a 0.8 percent rise in the category that includes oil drilling. That helped to offset a 2.6 percent drop in utility output, which reflected the unseasonably mild weather in December.

The overall wholesale price increase of 1.1 percent in 2006 was the smallest since prices actually fell 1.6 percent in the recession year of 2001.

In December, energy costs were up 2.5 percent after an even bigger 6.1 percent rise in November. But with global oil prices falling to 19-month lows, analysts believe further declines in energy prices are on the way.

Wholesale gasoline prices rose 7.1 percent last month, while prices of home heating oil were up 4 percent and prices of natural gas intended for home use were up 0.7 percent.

Food costs rose 1.7 percent in December, the biggest increase since October 2003, reflecting higher costs for fruits, vegetables, chicken and fish. Analysts said food costs were likely headed even higher in coming months, reflecting damage to citrus crops from the recent winter storms.

Excluding volatile food and energy, the core rate of inflation was just 0.2 percent in December, far below the 1.3 percent in November, which had been caused by a huge jump in the cost of new cars and trucks.

In December, new-car prices fell 0.2 percent while prices of light trucks, a category that includes sport-utility vehicles, rose 0.7 percent.

Core inflation was 2 percent for all of 2006, up slightly from 1.7 percent for all of 2005.