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New reports show that US economy is slowing down

US government reports released on Wednesday provided additional evidence that the economy is slowing amid credit problems and the housing downturn and raised expectations that the Federal Reserve is likely to cut interest rates when it meets this month.

Businesses surveyed by the Fed said that economic activity slowed at the end of last year, weighed down by a decline in holiday sales and tighter conditions in the housing market. Mortgage lending rates dropped and home values continued to fall.

Inflation rose only slightly in the same period, the Labor Department said in a separate report. While the consumer price index recorded one of its biggest yearly gains in decades, much of the increase came from record-high energy prices, and economists expect price pressures to taper off.

The reports help clear the way for the Fed to cut rates by at least half a point, analysts said. While a rate cut can stimulate economic activity, it can also lead to higher prices, making central bankers wary of any upticks in inflation.

Wednesday's report on the consumer price index "throws cold water on the argument that inflation is about to catapult in a higher, more destructive, level," wrote Bernard Baumohl of the Economic Outlook Group.

Fed policymakers now appear more concerned about a slowdown this year.

The business survey, known as the beige book, reinforced signs that the economy is growing sluggish.

"Investors believe the Fed will continue to focus on cutting rates and keeping us out of recession, because inflation hasn't gotten out of hand," said Sam Stovall, chief investment strategist for Standard and Poor's.

Investors who bet on the Fed's actions expect the bank to cut rates by a half-point, or even more, when the board meets on Jan. 29 and Jan. 30.

Stock markets appeared ambivalent on Wednesday's data, with the three major indexes swinging from red to black throughout the day.

The Standard & Poor's 500 index closed down 0.56 percent and the Dow Jones industrials gave up 0.3 percent. Technology stocks fared worse, sending the NASDAQ composite index to a 1 percent loss.

The consumer price index rose 0.3 percent last month, more than analysts had expected.

But inflation slowed from its 0.8 percent rise in November, quelling concerns among some economists.

Overall, inflation rose 4.1 percent last year, one of the highest rates in decades, as prices were pushed up by significant increases in the cost of oil and food.

But the core rate, which excludes the volatile costs of food and energy and offers a better sense of inflation in the broader economy, rose just 0.2 percent last month and 2.4 percent for the year, slightly above comfortable levels but still relatively contained.

The inflation report also suggested that the purchasing power of US workers was being steadily eroded. The cost of gasoline rose nearly 30 percent last year and medical care costs also soared. Commodities and food prices increased about 5 percent for the year.
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