01/18/2012 08:56 EST | Updated 03/19/2012 05:12 EDT

Wholesale prices dipped in December because of lower food, energy costs; core prices rose

WASHINGTON - Wholesale prices fell last month because companies paid less for food and energy, evidence that inflation remains tame.

The Labor Department said Wednesday that the producer price index, which measures price changes before they reach consumers, declined 0.1 per cent in December. That follows a 0.3 per cent rise the previous month and is the first drop since October.

Excluding volatile food and energy costs, so-called core wholesale prices rose 0.3 per cent. It was the largest increase in five months. Higher prices for pickup trucks, cars, and pharmaceuticals drove the increase.

Still, wholesale prices are trending lower. They increased 4.8 per cent in December compared to the same month a year ago. That's the slowest annual increase since January and down from a recent peak of 7.1 per cent in July.

Lower wholesale costs mean manufacturers and retailers don't face as much pressure to raise prices for consumers in order to maintain profits. That could keep consumer price inflation in check.

Low also inflation allows the Federal Reserve with more leeway to keep interest rates low and take other steps to boost the economy.

The Fed projects consumer price inflation will fall from about 2.8 per cent in 2011 to roughly 1.7 per cent this year. That's in the Fed's preferred range for core inflation of about 1.7 per cent to 2 per cent.

A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.

Wholesale price inflation peaked last year and most economists expect that it will continue to moderate. The prices of oil and agricultural commodities such as cotton and corn have fallen after spiking in early 2011.

The decline in commodity prices pushed down gas prices and enabled retailers to offer discounts on many goods. That helped boost consumer spending, which makes up 70 per cent of economic activity.

Consumer spending likely grew at the fastest pace in a year in the final three months of 2011. Some economists estimate that it rose at a 3 per cent annual pace in the October-December quarter, up from a 1.7 per cent rate in the third quarter.

As a result, overall growth may top 3 per cent in the fourth quarter. That would be an improvement from the 1.8 per cent annual pace in the July-September quarter and 0.9 per cent in the first six months of the year.