Core Prices Increase Slightly

U.S. producer prices jumped sharply in December but were well contained excluding food and energy costs, according to data released Friday, news likely to reassure the Federal Reserve it does not need to raise interest rates much further.

Other government data showed U.S. retail sales grew less than expected in December but rose much more than initially reported the prior month.

“We did see a big recovery in [producer] prices, but that was primarily in energy. Core prices increased only modestly and that’s good news for the Fed,” said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

Soaring prices for energy and food pushed U.S. producer prices up 0.9% last month, more than twice expectations, but prices outside those volatile areas remained tame.

The rise in the producer price index, a gauge of prices received by farms, factories and refineries, was the largest since September and topped Wall Street’s expectations. Economists had looked for a 0.4% increase.

The Labor Department said the so-called core PPI, which excludes food and energy, edged up 0.1% for the second straight month, suggesting that underlying inflation pressures remain muted. Markets expected core PPI to rise 0.2%.

But economists at Morgan Stanley noted that if a sharp 3.4% decline in auto prices was excluded, the core PPI showed a more robust increase of 0.3%.

“We’re seeing some upside price pressure in other goods relative to the trend. Capital goods, for instance, are exhibiting pricing power,” said Morgan Stanley economist Ted Wieseman, noting capital equipment prices gained 1.3%.

Higher energy prices are also pinching consumers and December retail sales showed mixed results outside of a very strong automobile sector.

U.S. retail sales rose a slightly smaller-than-expected 0.7% in December -- up just 0.2% when auto purchases were excluded -- but overall November sales were revised sharply higher.

Wall Street analysts had forecast retail sales to jump 0.9% last month, helped by sales of autos and electronic goods for the holidays. Sales excluding autos had been expected to rise 0.4%.

For all of 2005, retail sales grew 7.3%, just below the 7.6% gain in 2004. Excluding autos, sales for the year were up 8.3%, the Commerce Department said.

The lower-than-expected increases in December were offset by a strong upward revision to November data, however. November sales were revised to a 0.8% gain from an initially reported 0.3% advance.

In other data, the Commerce Department said U.S. business inventories rose 0.5% in November, slightly higher than forecast.