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U.S. prices hold steady
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January 17, 2001: 12:22 p.m. ET
CPI rises 0.2% in December, in line with forecasts; up 3.4% on year
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NEW YORK (CNNfn) - U.S. consumer prices posted their biggest increase in a decade last year, with a tame rise in the final month of the year as gasoline costs retreated, the government reported Wednesday -- more ammunition for Federal Reserve policy makers to lower interest rates if they so choose.
The Labor Department said its Consumer Price Index, the most closely watched inflation gauge, posted a 0.2 percent increase in December, matching the average forecast of economists polled by Briefing.com and marking the third straight month of price moderation.
 However, for the whole year, a 3.4 percent rise in prices marked the biggest advance since a 6.1 percent surge in 1990. Consumer prices were up 2.7 percent in 1999, which was the most moderate showing since 1996.
Stocks rose in the wake of the report as investors stuck with the belief that the Fed will lower interest rates again later this month, possibly by as much as a half point. On Jan. 3, the Fed surprised financial markets by suddenly and swiftly cutting rates a half point in an effort to avert recession.
"It's clearly good news," said Bill Cheney, chief economist with John Hancock Financial Services in Boston. "Clearly it means that the Fed is still free to ease as much as they are inclined to."
Price increases to remain moderate
The numbers were the latest piece of evidence pointing to moderating growth and subdued inflation, a combination the Fed had been looking to achieve through its series of rate increases between May 1999 and June of last year. The Fed lifted short-term rates 1.75 percentage points in 13 months to lift borrowing costs and slow the economy down.
 All the same, a majority on Wall Street now seems to agree that those rate increases have already done too much. Economists believe both core inflation pressures and the overall inflation gauge will moderate in 2001 as the economy slows. Overall economic growth, which soared at an estimated annual rate of around 5 percent in 2000, is expected to slow to just 2.5 percent this year.
With growth moderating and inflation expected to be tame, the Fed should have room to lower rates to stimulate economic activity without concern that prices at the wholesale or retail level will pick up, Cheney said. Fed officials meet Jan. 30-31 for their first policy meeting of the year.
"It is another piece of good news in that it leaves the Fed in an unfettered position to exercise more discretion in monetary easing," said Ned Riley, chief investment strategist with State Street Global Advisers in Boston. "Because the economy has displayed such weakness and inflation has been non-existent with the exception of energy-related prices, the short-term inflation number may be less relevant."
Core inflation remains subdued
Excluding food and energy, consumer prices rose 0.1 percent in December, a shade under forecasts and the smallest increase in a year. For all of 2000, the core rate of inflation rose by 2.6 percent, compared with an increase of 1.9 percent in 1999.
The 0.2 percent rise in consumer prices last month reflected a 0.2 percent increase in energy costs and a 0.1 percent gain in food costs. Gasoline pump prices, which soared mid-year amid concern about declining oil supplies, actually fell by 1.7 percent in December.
For all of 2000, energy prices rose by 14.2 percent, the biggest advance since an 18.1 percent rise in 1990 during the Persian Gulf war. Gasoline prices were up 13.9 percent following an even bigger 30.1 percent jump in 1999.
Natural gas prices rose 4.4 percent in December and a record 36.7 percent for all of 2000. Medical costs gained 4.2 percent, the worst showing since a 4.9 percent jump in 1994. And food prices gained 2.8 percent last year, the biggest increase since a 4.3 percent rise in 1996.
Separately, the Federal Reserve reported that industrial output fell 0.6 percent last month, weaker than Wall Street forecasts for a 0.5 percent decline. Manufacturers used 79.1 percent of capacity, down from 80.6 percent in November. For the year, industrial output gained 5.7 percent after a 4.3 percent gain in 1999.
-- from staff and wire reports 
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