January 16, 2008 / 3:19 PM / 12 years ago

WRAPUP 5-U.S. consumers strained by price surge last year

(Updates with Bush to speak to lawmakers, paragraph 6)

By Glenn Somerville

WASHINGTON, Jan 16 (Reuters) - U.S. shoppers faced moderate price rises in December, but that capped a year in which prices soared at the sharpest rate in 17 years, pressuring households also dealing with a steep housing downturn and tighter credit.

The Labor Department said on Wednesday its Consumer Price Index rose 0.3 percent in December, less than half November’s 0.8 percent jump. For all of 2007, the CPI rose 4.1 percent, well ahead of 2006’s 2.5 percent gain and the steepest since 1990.

Separately, the Federal Reserve said output by the nation’s mines, factories and utilities was flat in December and in 2007 posted its weakest gain since 2003.

The data, combined with a report on Tuesday showing a drop in December retail sales, “underlines our view that we’re on the razor’s edge here, that we could be headed into recession,” said Mike Schenk, senior economist with Credit Union National Association in Madison, Wisconsin.

A Reuters poll of 20 Wall Street primary dealers — big firms that deal with the Fed directly — found all expect the U.S. central bank to cut interest rates by a half percentage point when it meets Jan. 29-30.

The White House and lawmakers in Congress also are discussing a complementary fiscal stimulus plan. Democratic and Republican leaders of the U.S. House of Representatives agreed on Wednesday to cooperate in developing stimulus proposals and the White House said President George W. Bush would speak with lawmakers about the economy on Thursday.

Stock prices closed lower, with the Dow Jones industrial average .DJI down 35 points, partly because of declining prices for energy stocks.

The Nasdaq Composite Index .IXIC lost 23 points as technology shares weakened after a disappointing earnings report from sector bellwether Intel Corp (INTC.O). Intel's chief financial officer, Stacy Smith, said he was a "little bit cautious" about the economy's prospects, a comment that fed investor fears of a potential downturn.

U.S. Treasury debt prices were mostly lower as investors cashed out some profits after a string of recent gains.


The Fed’s latest Beige Book, an anecdotal summary of conditions across the country, found the economy was still growing in the final weeks of 2007 but at a weaker pace and with signs of rising stress among consumers.

“Most reports on retail activity indicated subdued holiday spending and further weakness in auto sales,” the Fed said, and housing activity was soft from coast to coast.

The Consumer Price Index is the most widely watched gauge of inflation. The so-called core CPI, which strips out volatile food and energy items, was up 0.2 percent in December after a 0.3 percent November increase, which some analysts said was a reassuring sign that price pressures might be easing, even if it was running a bit hot for some Fed policy-makers.

“Given this relatively calm inflation environment, the Fed need not be reluctant to significantly lower short-term interest rates,” said Bernard Baumohl, managing director of The Economic Outlook Group LLC in Princeton, New Jersey.

A fresh gauge of the housing sector’s woes came from the National Association of Home Builders, which said on Wednesday that its home builder sentiment index hovered just above a record low in January.

The NAHB/Wells Fargo Housing Market index rose 1 point from December to 19, with builders citing a glut in homes for sale and tight financing conditions. Readings under 50 mean more builders view market conditions as poor than favorable.

The Labor Department said both food and energy costs rose in 2007 at the fastest rates since 1990. Energy costs in the 12 months were up 17.4 percent, while food gained 4.9 percent.

In a separate report, the Fed said U.S. industrial production was flat in December, defying expectations for a decline. Manufacturing output was also flat last month following a revised 0.3 percent rise in November.

Despite signs of a slowing economy, foreign investors continued to pour money into U.S. investments. Net overall capital inflows into the United States surged to $149.9 billion in November, from a revised $92.2 billion in October, the Treasury Department said. (Additional reporting by Gertrude Chavez-Dreyfuss and Ellen Freilich in New York and Alister Bull in Washington; Editing by Dan Grebler)

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