Consumer prices see biggest rise in 17 years

WASHINGTON (Reuters) - Consumer prices rose 0.3 percent in December and for all of 2007 they shot up at the fastest rate in seventeen years, largely because of soaring energy costs, the Labor Department reported on Wednesday.

The Consumer Price Index, the most broadly used gauge of inflation, rose 4.1 percent in 2007, well ahead of the 2.5 percent increase posted in 2006 and the largest 12-month rise since a 6.1 percent increase in 1990.

December's CPI monthly rise followed a sharp 0.8 percent jump in November and was modestly ahead of Wall Street economists' forecasts for a 0.2 percent gain.

Analysts said it underlined the pressure consumer budgets were under but also left room for the Federal Reserve to cut interest rates again at the end of this month to help prop up the economy.

"What this means for monetary policy, it seems, is that there is some room in there for the Fed to go ahead and cut rates without fear that inflation is going to rear up," said Oscar Gonzalez, an economist at John Hancock in Boston.

Stock index futures remained negative after the prices data was issued and bond prices weakened on the slightly higher-than-expected December prices rise. The dollar's value declined against other major currencies.

Still, core prices that strip out volatile food and energy items rose 0.2 percent in December - in line with forecasts - following a 0.3 percent November increase. For all of 2007, core prices were up 2.4 percent following a 2.6 percent pickup in 2006. That was the smallest 12-month rise in core prices since a 2.2 percent increase in 2005.

The department said both food and energy costs rose during the full year of 2007 at the fastest rates since 1990. Energy costs in the 12 months were up 17.4 percent while food gained 4.9 percent.

Energy costs climbed at annual rates of 22.9 percent and 32.9 percent in the first and second quarters last year, then declined 14.8 percent in the third quarter before turning up again in the fourth quarter at a 37.1 percent annual rate.

Michael Metz, chief investment strategist for Oppenheimer & Co. in New York, said the rise in total prices was likely to crimp consumers' ability to spend, one of the reasons that some economists believe the economy may be headed into recession.

"I think the headline number indicates that personal consumption spending is going to continue to disappoint because that really hinders the ability of the consumer to make discretionary outlays," Metz said.

(Reporting by Glenn Somerville, editing by Joanne Morrison)