Energy Costs Push Up Consumer Prices In December

Inflation is pretty tame if you don’t count energy costs. Unfortunately, almost every consumer has to count those costs in his or her budget, making December an expensive month.

The Labor Department reports the Consumer Price Index rose 0.5 percent last month, but only 0.1 percent if you exclude energy. Energy costs, mostly gasoline, surged by 4.6 percent last month.

“Tame prices may still exist for most products but not for energy,” said economist Joel Naroff, of Naroff Economic Advisors, in Holland, Pa. “Consumer prices jumped in December as gasoline, heating oil, natural gas and electricity costs soared.  Except for medical care services, there was no other place where prices rose with any gusto.”

While inflation appears to be under control everywhere expect the gas pump, Naroff worries that consumers could soon feel the pinch of rising prices at the supermarket checkout counter. While food prices at the consumer level remained under control last month, food prices at the wholesale level are soaring.

Can't hold back much longer

“Finished consumer food producer prices rose by one percent in November and at nearly the same pace in December and while firms may be holding back, it is hard to see how they can eat so much of the higher costs,” Naroff said. “I expect the limited food price increases to change over the next few months.” 

For 2010 as a whole, consumer prices were up a very tolerable 1.5 percent even given the double-digit rise in energy commodities. While that appears to bode well for 2011, Naroff says storm clouds could quickly move in if food prices start accelerating.

And even though rising energy prices haven’t yet impacted the overall inflation rate, they could have a very negative impact on the economy.

“The surge in energy expenses is cutting into consumer spendable income and that could have an impact on overall consumption,” Naroff said. 

While fourth quarter 2010 household demand was solid, Naroff says its possible to see a softening of it early this year.  A jump in food prices would further restrain spending and the decline in the University of Michigan’s mid-month consumer confidence index hints that the surge in energy prices is starting to take its toll.