Wholesale prices increase, showing inflation on the rise

WASHINGTON -- Wholesale prices, stoked by higher costs for gasoline and food, registered their biggest rise in a year during April, providing fresh evidence that inflation is awakening after a long slumber.

The Labor Department reported Thursday that the Producer Price Index, which measures the prices of goods before they reach stores, rose by 0.7 percent last month, following a 0.5 percent gain in March.

"There's not an inflationary storm on the horizon, but there is definitely a cloudy inflationary sky," said Stuart Hoffman, chief economist at PNC Financial Services Group. "Inflation is becoming a bit of a nuisance after being quite tame and basically a nonfactor for the past year or more."

April's increase was the largest since a 1.3 percent increase in March 2003 and topped the 0.3 percent advance that economists were forecasting. Sharply higher prices for energy and food were the culprits of the gauge's increase last month.

Excluding energy and food prices, the core rate of inflation rose in April by 0.2 percent for the second straight month, in line with analysts' expectations.

In other economic news, sales at retailers dropped by 0.5 percent in April after a 2 percent gain in March, the Commerce Department reported. April's performance suffered from a sharp drop in automobile sales.

Economists viewed the decline as a temporary respite for shoppers because they splurged so much the month before. Analysts did not see the drop as a harbinger of drastic belt-tightening by consumers, whose spending accounts for roughly two-thirds of all economic activity.

Still, rising energy prices can crimp spending on other goods, a possible factor in April's sales decline and something that needs to be monitored, analysts said.

"When consumers are forced to pay more at the pump, it affects their spending in other categories," said Tracy Mullin, president of the National Retail Federation.

New filings for unemployment benefits rose last week by 13,000 to 331,000, the Labor Department said. Even with the increase, claims were at a level suggesting the job market is improving.

The more stable four-week moving average of claims, which smooths out weekly fluctuations, fell last week to 335,750, the lowest since Nov. 25, 2000.

The Dow Jones industrials lost 34.42 points to close at 10,010.74 as inflation fears gripped investors.

On the inflation front, an improving economic climate is giving some companies more power to raise prices, which many were hard-pressed to do when the economy was in a long slump.

While economic reports show inflation moving higher, Federal Reserve Chairman Alan Greenspan and his colleagues at their meeting last week indicated they are not yet worried. "Long-term inflation expectations appear to have remained well contained," they said then.

The Fed decided last week to hold short-term interest rates at a 46-year low of 1 percent, unchanged since last June. But the central bank signaled that rates could move higher now that the economic recovery is on solid ground. Some economists believe the Fed could begin raising rates as soon as June.

Although analysts do not believe inflation now threatens the recovery, the upward movement in the economic barometer marks a change in the pricing climate from a year ago. The Fed then was worried about the prospects of deflation, which is a prolonged and widespread price decline.

Energy prices rose 1.6 percent in April, compared with 0.6 percent in March. Gasoline prices went up 3.4 percent. Residential natural gas prices rose 2.5 percent and residential electric power costs increased 0.4 percent. Home heating oil, however, fell 1.3 percent.

Crude oil prices recently hit new 13-year highs, reflecting strong global demand and tensions in the Middle East.

Food prices rose 1.4 percent in April, on top of a 1.5 percent increase in March. More than half of April's increase was due to a 10.4 percent jump in prices for dairy products, the biggest rise since July 1946, the government said. Higher dairy product prices stem from a number of factors, including using more cows for beef rather than milk production, economists said.

Prices for beef and veal, soft drinks and pork also were higher. Costs for eggs and vegetables fell sharply in April.

Rising energy prices are driving up transportation costs to get food products to grocery stores, a possible factor in the rise in overall food prices, economists said.