Inflation Rate Is Worst in 17 Years

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WASHINGTON (AP) -- Higher costs for energy and food last year pushed inflation up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas. Meanwhile, industrial output was flat in December, more evidence of a significant slowdown in the economy.

Consumer prices rose by 4.1 percent for all of 2007, up sharply from a 2.5 percent increase in 2006, the Labor Department said Wednesday. Consumers felt the pain when they filled up their gas tanks or shopped for groceries. Prices for both energy and food shot up by the largest amount since 1990.

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Outside of food and energy, inflation rose a more moderate 0.2 percent in December. This measure of core inflation rose by 2.4 percent for all of 2007, down slightly from a 2.6 percent increase in 2006.

The Federal Reserve is closely watching to see whether the jump in food and energy becomes more widespread and starts pushing core inflation higher.

Analysts said that with core prices generally remaining well-behaved, it will give the central bank the leeway to cut interest rates further to battle a serious economic slowdown triggered by a steep slump in housing and a spreading credit crisis.

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The CPI report showed that the 4.1 percent increase in overall prices was the biggest since a 6.1 percent jump in prices in 1990.

Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.

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Workers' wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the biggest setback since a 1.5 percent fall in 2005.

http://biz.yahoo.com/ap/080116/economy.html