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Wholesale Inflation Plunges

U.S. inflation at the wholesale level fell in November by the largest amount in 2 1/2 years, reflecting big declines in gasoline and other energy products. The declines were expected to be short-lived, however, given that energy prices are on the rise again.

The Labor Department reported Tuesday that wholesale prices dropped by 0.7 percent last month, the biggest decline since a 1.5 percent plunge in April 2003. The drop reflected a sizable 4 percent fall in energy prices, which came after four months of sizable gains related to higher global oil prices and hurricanes Katrina and Rita, which caused widespread shutdowns of oil wells and refineries along the Gulf Coast.

The big drop in wholesale prices in November mirrored a similar 0.6 percent fall in consumer prices, the biggest drop in 56 years. But analysts cautioned that the good news on inflation may not last with gasoline prices rising again and Americans facing substantial increases in home heating costs compared to a year ago.

In other economic news, construction of new homes and apartments rose by 5.2 percent in November to a seasonally adjusted annual rate of 2.123 million units. Applications for building permits were also up 2.5 percent to an annual rate of 2.155 million units.

While the November increase in housing construction was the biggest since April, analysts are still expecting activity to slow in the months ahead as buyers react to continued increases in home mortgage rates.

For November, housing was strong in all parts of the country except the South, which saw a 1.3 percent drop in housing starts. Construction activity rose by 12.3 percent in the Midwest, 11 percent in the Northeast and 11.5 percent in the West.

The government's Producer Price Index measures inflation pressures before they reach the consumer. The November reading showed that the 4 percent drop in energy prices was the biggest one-month decline since 7.2 percent fall in April 2003, a time when prices were retreating after America's initial successes in the Iraq war.

Last month, gasoline prices dropped 10.7 percent while home heating oil was down by 15.5 percent and natural gas prices were down 0.5 percent. However, pump prices rose last week after a string of declines and home owners are braced for significant increases in heating costs this winter compared to a year ago.

Food prices were up 0.5 percent in November after having fallen by 0.1 percent in October. More than half of last month's increase came from a 13.4 percent jump in egg prices. Citrus prices rose by 35.2 percent, the biggest jump in almost seven years.

Excluding energy and food, the so-called core rate of inflation at the wholesale level showed a small increase of 0.1 percent last month after a decline of 0.3 percent in October.

Wholesale prices over the past 12 months have risen by 4.4 percent, reflecting the jump in energy prices this year. Excluding food and energy, wholesale prices are up a more moderate 1.7 percent over the past 12 months.

The Federal Reserve earlier this month boosted a key interest rate for a 13th time but indicated that the rate hikes could be drawing to a close.

Many economists are looking for two more quarter-point moves in January, which will be Alan Greenspan's last meeting, and in March, which will be the first meeting for Ben Bernanke, who has been tapped to succeed Greenspan.

Despite the recent good news on inflation, some economists worry that the Fed will be forced to raise rates higher than currently expected if the jump in energy costs begins to spill over into more widespread inflation problems.

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