The Wall Street Journal-20080117-Politics -amp- Economics- Rising Prices Unlikely to Deter Fed- Rate Cut Still Seen As Credit Tightens- Slowdown Spreads

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Politics & Economics: Rising Prices Unlikely to Deter Fed; Rate Cut Still Seen As Credit Tightens, Slowdown Spreads

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Consumer prices crept higher last month, but the rise is unlikely to discourage the Federal Reserve from cutting interest rates amid signs that the economic slowdown is spreading and credit is tightening.

Consumer prices rose 0.3% in December, less than November's 0.8% increase, while core prices, which exclude energy and food prices, gained 0.2%, the Labor Department said. Prices were up 4.1% from a year earlier, however, the biggest December-to-December increase since 1990. Core prices increased 2.4% on the year.

Wages failed to keep pace. Average weekly wages, adjusted for inflation, fell 0.9% in December from the year before, the biggest such decline since 1990, the government said. Wages rose 2.1% in 2006.

"It's not a big head-scratcher why people feel economically anxious; their paychecks are being squeezed," said Jared Bernstein, economist at the Economic Policy Institute, a liberal think tank in Washington.

Economists said the wage picture could darken further this year, given the rise in the jobless rate to 5% in December. That, in turn, could hold down consumer spending.

Fed Chairman Ben Bernanke, who is scheduled to testify today before the House Budget Committee, opened the door last week to "substantive" interest-rate cuts to counter the threat to the economy posed by fragile financial markets and weakening employment. His remarks were widely viewed to mean that the Fed would reduce its short-term interest-rate target -- probably by half a percentage point from its current 4.25% -- at the central bank's next meeting, Jan. 29-30.

Data released yesterday didn't change those expectations, economists said. The Fed reported that industrial output was flat last month, as weakness in automobile production was offset by increased output of technology and business equipment.

In addition, the central bank's latest "beige book," its regular survey of business activity across the country, found that the economy grew at a "slower pace" from mid-November through December but said gains in tourism helped bolster regional economies struggling with weak housing markets and tighter credit. The report, which wasn't as gloomy as some other forecasts that say the economy is on the verge of a recession, offered a mixed outlook.

The survey, which is based on reports from the Fed's 12 district banks, found that credit standards continued to tighten for both consumer and business loans, and that delinquencies are rising in many regions. The New York region reported that delinquencies rose across various loan types, and that delinquencies in consumer loans rose to the highest level in 13 years.

But the survey also said labor-market conditions "remained relatively tight," especially for skilled workers. That assessment is at odds with the rise in the unemployment rate.

Economists disagreed about what the report signaled. "This report may indicate there is potential for an upward revision to job growth last month or, alternatively, a bounce in January's data," said Drew Matus, economist at Lehman Brothers, in a research note. But Global Insight economist Brian Bethune said the survey "suggests that the economic slowdown is broadening, especially with respect to consumer spending and construction activity."

In a bright spot, the survey reported big increases in tourism, in part because the weak dollar is luring foreign visitors to the U.S. The Orlando International Airport was on track for a record year in passengers as European and Canadian visitors flocked to Florida, the report said. Ski resorts in the Minneapolis and Richmond districts got a boost from wintry weather. It also noted that Canadian shoppers helped bolster holiday sales in Buffalo, N.Y., and auto sales in Montana.

On prices, the annual growth in core consumer inflation -- though rising -- isn't too far above the top end of the Fed's target of around 1.5% to 2%. The Fed's preferred inflation gauge, the core price index for personal-consumption expenditures, is also slightly above that range, up at an annual rate of 2.2% through November.

"A high-side core [consumer-price index] reading won't stop the Fed from easing aggressively later this month, but it will make that exercise more uncomfortable than it otherwise would be," said J.P. Morgan economist Michael Feroli, in a research note.

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Sara Murray and Jeff Bater contributed to this article.

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