Consumer prices rose by the largest rate in five years in 2005, reflecting a surge in energy costs, although other prices remained well behaved.
And in other good news, inflation ended the year on a tame note with overall prices dropping by 0.1 percent in December following an even bigger 0.6 percent decline in November. It marked the first back-to-back monthly declines in consumer prices since late 2003.
The 3.4 percent increase in consumer prices for the 12 months ending in December was up slightly from a 3.3 percent rise in 2004. It was the biggest annual gain since a similar 3.4 percent price rise in 2000, the final full year for the country's 10-year economic expansion, the longest in U.S. history.
Both 2004 and 2005 were heavily influenced by soaring energy prices, which jumped by 17.1 percent last year and were up 16.6 percent in 2003. Both years posted the biggest increases in energy costs since 1990, a year when Iraq's invasion of Kuwait sent tremors through global oil markets.
However, outside of energy and food, the 2.2 percent rise in core inflation matched the increase in 2004 with both years up from a tiny 1.1 percent increase in 2003, a year when the Federal Reserve cut interest rates to a 45-year low to guard against the remote possibility of deflation, a destabilizing fall in prices.
Since June 2004, the Fed has been pushing interest rates gradually higher. It is expected to boost rates for a 14th time at its Jan. 31 meeting, the final session for Federal Reserve Chairman Alan Greenspan, who is stepping down after 18 1/2 years at the central bank.
The Fed triggered a huge stock market rally in the first week of the new year when minutes of its December discussions indicated that the central bank was getting close to the end of its credit tightening campaign.
The Labor Department said that 40 percent of the 2005 rise in inflation came from the jump in energy costs
However, energy prices moderated at the end of the year, dropping by 2.2 percent, the third consecutive monthly decline in energy costs after a huge surge in September that had been caused by widespread shutdowns of Gulf Coast production facilities following Hurricane Katrina.
Gasoline prices had surged to a record well above $3 per gallon while crude oil prices topped $70 per barrel.
Analysts are expecting moderate inflation for 2006 but they caution that a lot will depend on whether energy prices retreat or whether those costs keep rising and start to spill out to other parts of the economy.
Indications in this area have not been good in recent days with crude oil prices rising to a 3 1/2-month high — above $66 per barrel — and with motorists around the country noticing a resurgence in rising prices at the pump.
For December, food prices posted a modest 0.1 percent increase while clothing prices actually fell by 0.3 percent and medical care, which had been surging, slowed to a 0.1 percent gain.
Excluding food and energy, core inflation was up 0.2 percent in December
An idea for an article commentary would be to assess the impact of an increase in energy prices in terms of the five main elements of the macroeconomy that is namely exchange rates, growth, balance of payments accounts, inflation and unemployment. If you did all five however the commentary might end up being too big so I suggest focusing on just one. For example if you decided to focus on inflation you could write about how and increase in energy prices would affect the prices of all goods seeing that in the industrialised era we are living in energy prices are the main cost of most firms since they all produce their goods in factories. As a result you could explain how this increase in energy prices would lead to cost push inflation or even stagflation as observed in the 1970s with a similar increase in the cost of energy. If you chose to talk about the exchange rate you could say that increased energy prices would translate into lower exchange rates for developed countries since due to the higher prices caused by higher energy costs global demand for their goods would fall. Contrastingly in the case of developing countries there would be an increase in their exchange rates as most of their products are man made due to capital shortages in their country. You could follow a similar line of thinking when analysing the other 3 elements of the macroeconomy.