Mixed Signals on Inflation

U.S. consumer prices fell unexpectedly in December but an increase in costs outside of food and energy reinforced expectations that the Federal Reserve would continue to raise interest rates to contain inflation, according to government data released Wednesday.

The Labor Department’s consumer inflation report also showed that wages last year failed to keep up with price increases.

A separate report Wednesday showed net flows of capital into U.S. assets fell to $89.1 billion in November, in line with market forecasts and more than enough to cover the trade deficit.

Also, in its latest “beige book” snapshot of business activity nationwide, the Federal Reserve reported that the economy chugged ahead as the new year opened with manufacturing picking up, employment improving and retail sales rising.

The housing market showed fresh signs of cooling but still was in good shape, the Fed said.

And Richmond Federal Reserve President Jeffrey Lacker said Wednesday that the central bank had at least one more rate hike to go before halting its 18-month tightening campaign, but it might have a harder time giving hints after that.

“We’re obviously going to take it a meeting at a time and do our best to assess what the appropriate rate is,” Lacker said in Baltimore. “From my point of view, I will be looking at whether the current rate and the expected trajectory of the rate is consistent with a balance in terms of current versus future resources.”

The Labor Department’s report on consumer prices in December offered mixed inflation signals. Overall prices declined 0.1% last month, bucking Wall Street expectations for a 0.2% rise, as a drop in the cost of energy, transportation and apparel more than offset increases in education, food and shelter.

But prices were up 3.4% from a year earlier, the largest calendar-year increase since 2000 and well above the annual rise in average weekly earnings -- meaning consumer incomes are not keeping pace with rising prices.

The closely watched core consumer price index, which excludes volatile food and energy costs, climbed 0.2% in December, matching market forecasts.

Core inflation on a year-over-year basis picked up to a 2.2% rate, the fastest pace since March and slightly above the Fed’s presumed comfort range for price increases.

The Fed has been raising interest rates since mid-2004 in a bid to head off inflation pressures and is expected to lift borrowing costs again when the policy-setting Federal Open Market Committee next meets Jan. 31.

The decline in overall consumer prices in December was driven by a 2.2% decrease in energy prices, a 0.8% dip in transportation costs and a 0.3% fall in the cost of apparel, the Labor Department report showed.

Gasoline prices fell 2.6%, natural gas costs were down 3.5% and fuel oil prices fell 2.5% last month. Electricity costs were down a milder 0.6%.

But energy prices have climbed in recent days amid concern about unrest in petroleum-rich Nigeria, and economists are worried that the higher costs will eat into household budgets, slowing consumer spending and economic growth in 2006.

In a separate report, the Labor Department said real average weekly earnings rose 0.1% in December after a 0.8% gain the previous month.

Average weekly earnings were up 3.1% from December 2004, but since prices rose even faster, real earnings were down 0.4% from a year earlier.

The report on capital inflows, released by the Treasury Department, showed net capital inflows slipped from October’s revised record high of $104.2 billion. Excluding foreign stocks and bonds, inflows declined slightly in November to $103.2 billion from a revised $107.3 billion in October.