- The Washington Times - Wednesday, January 18, 2006

ASSOCIATED PRESS

Record prices for gasoline and other fuels sent inflation rising in 2005 at the fastest pace in five years.

Consumer prices rose 3.4 percent last year, with 40 percent of the increase blamed on the biggest jump in energy costs since 1990. Energy costs rose 17.1 percent last year, reflecting gasoline prices that soared past $3 a gallon and crude oil prices that topped $70 per barrel.

There has been hope that overall inflation will slow to 2.5 percent in 2006. But that is based on a belief that energy prices will calm down after two years of big increases, something that has not yet occurred.

Crude oil prices surged to 3-month highs this week, reflecting concern about a standoff with Iran over its nuclear program and supply disruptions because of violence in Nigeria.

“Given the tightness of supply and demand, it isn’t taking much to push energy prices sharply higher,” said Oscar Gonzalez, chief economist at John Hancock Financial Services in Boston.

Overall inflation declined 0.1 percent in December, an unexpectedly good performance, after a 0.6 percent drop in November.

That represented the first consecutive monthly declines in two years, but both months were heavily influenced by price declines in gasoline and other fuels that are expected to be reversed in January.

The 3.4 percent rise in overall inflation for the 12 months ending in December was slightly higher than a 3.3 percent increase in 2004 and was the biggest advance since a 3.4 percent rise in 2000.

For 2005, gasoline prices were up 16.1 percent. Natural gas prices jumped by 30.2 percent and home heating oil was up 27.2 percent, huge increases that are being felt in higher heating bills this winter.

Outside of the volatile food and energy categories, core consumer inflation rose 2.2 percent last year, matching the performance in 2004.

Separately, the Labor Department reported yesterday that average hourly earnings for American workers slipped 0.5 percent for the 12 months ending in December, when inflation is taken into account. That compared with a 0.7 percent drop in inflation-adjusted earnings for workers in production and nonsupervisory jobs in 2004.

Analysts said weak wages were affecting consumer confidence.

“People see energy prices going up and they get a little worried about what they can afford to spend money on,” said David Wyss, chief economist at Standard & Poor’s in New York.

In its latest look at regional economic conditions, the Federal Reserve reported yesterday that the economy was expanding at a moderate pace as the new year began with employment, manufacturing and consumer sales rising while price increases were described as moderate.

Since June 2004, the Fed has increased interest rates 13 times to ensure that higher energy costs don’t become embedded in higher overall inflation as similar oil shocks did in the 1970s.

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