The Labor Department reported Thursday (Jan. 18) that consumer prices rose by 2.5% in 2006, the best showing since prices had increased by just 1.9 percent in 2003.
According to the Associated Press, the improvement came in spite of the fact that consumer prices jumped 0.5% in December, as gasoline prices staged a momentary rebound.
The slowdown in inflation translated into more spending power for Americans. The government said average weekly earnings for non-supervisory workers rose by 2.1% last year, after adjusting for inflation. That was the biggest gain in nine years.
The 0.5% December increase in consumer prices had been expected, given that gasoline costs rebounded during the month. However with crude oil prices setting 19-month lows in recent weeks, the expectation is that gasoline costs will resume their downward trend and stay well below the record level of over $3 per gallon, set last summer.
For all of 2006, energy costs rose 2.9%, a significant slowdown after an increase of 17.1% in 2005 and 16.6% in 2004. That price moderation occurred in recent months. After advancing at a 22.8% annual rate in the first six months of 2006, energy costs fell at a 13.4% rate in the final half of the year.
Core inflation, which excludes volatile energy and food costs, rose by 2.6% in 2006, up from gains of 2.2% in both 2004 and 2005.
The Federal Reserve has been watching the performance of core inflation closely for signs that the surge in energy costs in recent years was breaking out to more widespread inflation troubles.
Analysts believe the central bank could start cutting interest rates by this summer if core inflation continues to show improvement.