Jan. 16 (Bloomberg) -- Consumer prices in the U.S. rose at a slower pace in December, signaling that inflation may decelerate after recording its fastest pace in 17 years in 2007.

The cost of living increased 0.3 percent after a 0.8 percent gain in November, the Labor Department said today in Washington. The median forecast of economists surveyed by Bloomberg News was a 0.2 percent rise. Prices excluding food and energy advanced 0.2 percent, after a 0.3 percent increase.

Slower economic growth will make it more difficult for companies to pass on higher costs to consumers, suggesting inflation will continue to cool, economists said. Smaller price gains also maker it easier for the Federal Reserve to keep cutting interest rates to fend off recession.

``With the sluggish growth outlook and rising risk of recession, inflation concerns have receded,'' said Zach Pandl, an economist at Lehman Brothers Holdings Inc. in New York, who correctly forecast the increase in prices. ``The Fed is clearly focusing on growth at this point.''

Industrial production was unchanged in December, against the median forecast for a drop, a Fed report also showed today. Capacity utilization, which measures the proportion of plants in use, fell to 81.4 percent from 81.6 percent in November.

Treasury notes were little changed after the report. The yield on the benchmark 10-year note was 3.70 percent at 9:20 a.m. in New York, from 3.68 percent late yesterday.

Economists' Forecasts

The median forecast for consumer prices was based on 76 estimates in the Bloomberg survey. Projections ranged from no change to a 0.6 percent gain. The increase in core prices matched the survey median.

For all of last year, consumer prices rose 4.1 percent, the most since 1990. The core rate increased 2.4 percent after a 2.6 percent increase in 2006.

Energy prices last month rose 0.9 percent, after rising 5.7 percent the previous month. Fuel costs were up 18 percent in 2007, also the most in 17 years.

Food prices, which account for about a fifth of the CPI, increased 0.1 percent, the smallest increase of any month in 2007.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

The government yesterday said producer prices unexpectedly eased 0.1 percent at the end of a year that saw the biggest annual jump in more than a quarter century. The cost of imported goods was unchanged in December, a report last week showed.

Wholesale Prices

PPI and CPI have some differences in timing that may cause discrepancies. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.

Rents, which make up almost 40 percent of the core CPI, rose 0.3 percent.

Slower economic growth may help damp price pressures, economists said.

The economy will expand at an average 1.5 percent pace in the first half of this year, the same as forecast for the fourth quarter, according to the median estimate in a Bloomberg News survey taken earlier this month.

Fed Chairman Ben S. Bernanke and several of his colleagues last week said they are growing more concerned about growth. Bernanke pledged ``substantive additional action'' to ensure against ``downside risks'' to the economic expansion.

Fed's Plosser

Philadelphia Fed Bank President Charles Plosser, who economists consider the toughest on inflation, told PBS television on Jan. 11 that he'll ``certainly'' consider additional interest-rate cuts after consumer spending slowed more than he expected.

Traders anticipate the Fed will lower its benchmark rate by at least a half point this month, to 3.75 percent, and odds of bigger reductions have climbed.

Some merchants are already cutting prices to try to lure buyers. Williams-Sonoma Inc., the U.S. gourmet-cookware retailer, yesterday reduced its fourth-quarter profit forecast following an unexpected decline in holiday sales. The San Francisco-based company said it marked down merchandise and offered cheaper shipping at its Pottery Barn.

This year may be ``increasingly challenging,'' Chief Executive Officer Howard Lester said in the statement.

Those manufacturers facing less price-sensitive demand are trying to pass rising costs to consumers. General Mills Inc., the second-largest U.S. cereal maker, this week said it expects to raise prices later this year to recovering higher dairy and wheat costs.

The Minneapolis-based company raised prices on such products as Yoplait yogurt and Pillsbury refrigerated dough on Nov. 1 following increases earlier in the year.

To contact the reporter on this story: Courtney Schlisserman in Washington cshlisserma@bloomberg.net

Last Updated: January 16, 2008 09:22 EST