Jan. 16 (Bloomberg) -- Consumer prices in the U.S. rose at a slower pace in December and industrial production failed to grow, giving the Federal Reserve the room and reason to cut interest rates at its next meeting on Jan. 30.

The cost of living increased 0.3 percent after a 0.8 percent gain in November, the Labor Department said today in Washington. Output at U.S. factories was unchanged in December as exports helped make up for declines in auto and housing- related production, the Federal Reserve said separately.

Slower growth will make it more difficult for companies to pass on higher costs, suggesting inflation will cool from last year's pace, the fastest in 17 years, economists said. Investors' attention may now shift to Chairman Ben S. Bernanke's testimony on the economy tomorrow at a hearing in Congress.

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

Economists had anticipated a 0.2 percent increase in consumer prices last month, according to the median forecast in a Bloomberg News survey.

Prices excluding food and energy advanced 0.2 percent, after a 0.3 percent increase, matching the median estimate.

Treasury notes were little changed after the reports and later fell. The yield on the benchmark 10-year note was 3.70 percent at 1:03 p.m. in New York, compared with 3.67 percent late yesterday. Most stocks rose better-than-estimated results at JPMorgan Chase & Co. and Wells Fargo & Co. spurred confidence that banks will rebound from credit-market losses.

Builder Confidence

Homebuilder confidence held near a record low in January, signaling the housing recession will persist for much of 2008, a private report also showed. The National Association of Home Builders/Wells Fargo index of builder sentiment rose to 19 from a reading of 18 in December that was lower than previously estimated, the Washington-based group said. Levels less than 50 mean most respondents view conditions as poor.

Capacity utilization, which measures the proportion of plants in use, fell to 81.4 percent from 81.6 percent in November, indicating greater slack in the economy, the Fed's report showed. Economists had predicted a 0.2 percent drop in output and a capacity-in-use rate of 81.2 percent.

Fed Action

``There is nothing that would keep the Fed from cutting 50 to 75 basis points later this month,'' based on today's data, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp. in New York.

Traders anticipate the Fed will cut its benchmark rate to 3.75 percent, from 4.25 percent, this month, futures prices show. The chance of a 75 basis-point cut was 42 percent. Policy makers are next scheduled to gather Jan. 29-30. A basis point is 0.01 percentage point.

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

Energy prices last month rose 0.9 percent, after gaining 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 one-fifth of the CPI, increased 0.1 percent, the smallest gain 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.

Wholesale Prices

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.

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.

``We do not think this precludes the Fed from taking significant rate cut action at the January'' Fed meeting, said Sam Bullard, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ``If we see demand softening, which is what most economists believe will happen in the first half of the year, that will definitely reduce firms' abilities to raise prices.''

Growth Forecasts

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.

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.

The Fed chief testifies to the House Budget Committee on the economic outlook tomorrow from 10 a.m. in Washington.

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 13:05 EST