WASHINGTON - A surge in the cost of gasoline and other energy products pushed consumer prices up by 3.3 percent in 2004, the biggest jump in four years, but relief might be on the way - consumer prices dipped in December as energy costs moderated.
The Labor Department reported Wednesday that its closely watched Consumer Price Index edged down 0.1 percent last month, reflecting the biggest drop in energy prices since July.
The 3.3 percent increase in prices for all of 2004 was the biggest jump since a 3.4 percent rise in 2000. It represented a significant acceleration from a moderate 1.9 percent rise in consumer prices in 2003.
Price pressures last year were dominated by a 16.6 percent surge in fuel bills, the biggest jump in 14 years, as gasoline prices jumped by 26.1 percent, natural gas was up 16.4 percent and home heating oil rose by 39.5 percent.
Those hefty price increases, reflecting turmoil in global oil markets, caused a major slowdown in economic activity in the late spring as consumers, struggling to pay higher energy bills, suddenly stopped spending on other items.
Forecasters, however, believe inflation will moderate significantly this year if crude oil prices, which hit a record $55 per barrel in October, fall back to below $40 per barrel by the end of this year. However, they concede that is a big if, given the high potential for further violence in the Middle East aimed at disrupting oil supplies in such hot spots as Iraq and Saudi Arabia.
"All we need is some event out there to occur and gum up the works," said Nariman Behravesh, chief economist at economic consulting firm Global Insight. "Oil is the big wild card."
The news on inflation was one of a number of encouraging reports released Wednesday depicting an economy moving forward at a brisk pace at the end of last year and heading into 2005.
The Labor Department said the number of laid-off workers filing new claims for unemployment benefits totaled 319,000 last week, a drop of 48,000 from the previous week.
It was the biggest one-week improvement in more than three years and relieved worries that the job market might be weakening because of two prior weeks of rising jobless claims.
Construction on new homes and apartments, after being depressed by rainy weather in November, soared 10.9 percent in December, the Commerce Department reported. For the year, construction climbed 5.7 percent, the fourth annual gain in a row, as work was started on 1.953-million homes and apartments.
Housing has boomed in recent years as the Federal Reserve cut interest rates to the lowest levels in 46 years. But with the Fed raising rates to make sure inflation does not get out of control, analysts said the country has probably seen a peak for housing activity.
David Seiders, chief economist for the National Association of Home Builders, predicted construction would decline slightly to about 1.88-million housing starts this year, which he said would "still be an excellent year for housing."
"We are entering 2005 with a lot of momentum. We have a strong job market, a soaring housing market and growth that is broad based across the country," said Mark Zandi, chief economist at Economy.com.
Outside of the volatile energy and food sectors, the so-called core rate of inflation posted a small 0.2 percent increase in December and for the whole year was up 2.2 percent.
While that gain was higher than the 1.1 percent rise in core inflation in 2003, that performance had been the best showing since 1960 and came during a time that inflation was so subdued that Fed policymakers were worrying about the potential for a destabilizing bout of deflation, where prices start falling.
Analysts said they believed the increase in core prices last year was within the Fed's comfort zone on inflation and would allow the central bank to keep raising rates at moderate pace of quarter-point moves at their eight scheduled meetings in the new year.
