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Wholesale prices declined slightly in December

WASHINGTON (AP) — U.S. 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 percent in December. That follows a 0.3 percent rise the previous month and is the second drop in three months.

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

Still, overall wholesale prices are trending lower. They increased 4.8 percent 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 percent in July.

And the increase in core prices may be temporary. Flooding last year in Thailand may have disrupted some auto supply chains, pushing pickup truck and car prices higher.

Higher truck prices accounted for about one-third of the increase in core prices.

“Both headline and core inflation should be a lot lower by the end of this year,” said Paul Ashworth, chief U.S. economist at Capital Economics, in a note to clients.

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 percent in 2011 to roughly 1.7 percent this year. That’s in the Fed’s preferred range for core inflation of about 1.7 percent to 2 percent.

Food prices fell 0.8 percent, mostly because of a big drop in vegetable prices. Tomatoes fell 36.9 percent, the most since May, while lettuce prices dropped by almost 25 percent. The drop follows a big increase in vegetable prices in November.

Pork prices fell last month by the most in more than three years, and chicken costs also declined.

Energy costs also dropped 0.8 percent, in part because of a decline in seasonally adjusted gas prices. Residential natural gas costs also fell, reflecting an increase in natural gas drilling from U.S. shale rock deposits.

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 percent 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 percent annual pace in the October-December quarter, up from a 1.7 percent rate in the third quarter.

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