Wholesale prices trigger warning about inflation

WASHINGTON -- Wholesale prices rose 0.3 percent last month as the costs of everything outside of food and energy jumped by the largest amount in more than six years.

The price spike could set off alarm bells at the Federal Reserve and perhaps lead to steeper increases in interest rates if inflation pressures do not subside.

The increase reported Friday in the Labor Department's Producer Price Index, which is designed to track inflation pressures before they reach consumers, reversed a 0.3 percent decline in December.

While the overall figure was in line with expectations, prices outside of food and energy jumped by 0.8 percent, four times what analysts had been expecting. It was the biggest one-month jump in what is called the core rate of inflation since a 1 percent increase in December 1998.

Prices surged for tobacco, alcohol and new cars and trucks. And even outside of those areas, increases were widespread, covering everything from clothing to toys and costume jewelry.

"The core figure was a little scary," said David Wyss, chief economist at Standard & Poor's in New York. "This is probably a one-time pop but we will have to watch carefully."

Wyss and other economists argued that a number of special factors, such as increased state taxes on tobacco and alcohol, and the elimination of attractive incentives on cars contributed to the January increase.

They said they still looked for consumer prices, which will be reported Wednesday, to rise by a moderate 0.2 percent.

But analysts conceded that if wholesale inflation does not subside and instead begins to seep into consumer prices, then the Fed is likely to start raising interest rates at a much quicker pace.

The bond market was jolted by the unexpectedly bad report on wholesale inflation, pushing yields of Treasury's benchmark 10-year note to 4.27 percent, up from 4.18 percent Thursday, as inflation fears caused a sell-off in long-term bonds.

Stock investors were not as worried. The Dow Jones industrial average rose 30.96 points to close at 10,785.22.

Analysts said they did not think the Fed would alter its course of "measured" quarter-point rate increases. So far, the Fed has pushed the short-term rate it controls from a 46-year low of 1 percent to 2.5 percent currently with the sixth rate increase occurring on Feb. 2.

Federal Reserve Chairman Alan Greenspan, delivering the Fed's semiannual monetary report to Congress this week, indicated that while inflation pressures appeared still to be under control the Fed was watching carefully for any signs that this could be changing.

Mark Zandi, head of Economy.com., said he believed the higher costs for wholesale products would start to push up consumer prices but not until later in the year, allowing the Fed to keep raising rates gradually until then.

"I think the Fed will stick to their measured tightening moves for the foreseeable future," Zandi said.

Energy prices, which had driving the overall inflation rate higher, actually fell for a second straight month in January, dropping by 1 percent after an even bigger 2.5 percent plunge in December.

Gasoline prices at the wholesale level were down 4.2 percent last month although analysts cautioned that the government's survey was done early in the month and did not pick up price increases that began showing up at the pump later in January.

Food costs, which had surged in October because of hurricane damage to crops in Florida, actually dropped by 0.2 percent in January as supplies returned to more normal levels. The decline reflected lower costs for vegetables, fresh fruits and eggs. But coffee and beef prices were up.

The big 0.8 percent rise in core inflation, the biggest increase since a 1 percent surge in December 1998, was led by a 3.4 percent increase in the price of cigarettes. That was the biggest spike in tobacco prices since a 4.4 percent jump in April 2002.

The price of alcoholic beverages climbed 2.8 percent, the biggest one-month jump in nearly five years, while new car prices were up 1.2 percent and the price of light trucks rose by 0.9 percent.

The 0.3 percent decline in wholesale prices in December had originally been reported as a bigger drop of 0.7 percent. However, the overall figure and the component price measures were all readjusted to reflect the use of updated seasonal adjustment factors.

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On the Net:

Bureau of Labor Statistics report on wholesale inflation: http://bls.gov/ppi