June 17 (Bloomberg) -- Prices paid to U.S. producers rose more than forecast in May as fuel and food costs climbed.

The 1.4 percent jump was the biggest gain since November and followed a 0.2 percent increase in April, the Labor Department said today in Washington. So-called core prices, which exclude energy and food, increased 0.2 percent.

Companies are paying more for energy and raw materials, which erodes profits and makes it more likely they'll be forced to raise prices. The report reinforces Federal Reserve policy makers' concern that inflation pressures are picking up.

``It's going to further compress companies' profits,'' said Russell Price, senior economist at H&R Block Financial Advisors in Detroit, who had forecast a 1.1 percent increase in producer prices. ``We do have further inflationary pressures ahead as some energy prices will filter through.''

After the report, Treasuries stayed higher and the dollar remained little changed against the euro. The 10-year note yield was down 7 basis points to 4.20 percent at 9:03 a.m. in New York. The dollar traded at $1.5488 per euro from $1.5477 yesterday.

A separate report from the Commerce Department showed housing starts fell 3.3 percent in May to a 975,000 pace, less than anticipated. Building permits, a sign of future construction, fell 1.3 percent to a 969,000 rate.

Prices paid to factories, farmers and other producers were forecast to rise 1 percent, according to the median of 73 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.6 percent to 1.6 percent.

Core Prices

Core prices were projected to rise 0.2 percent, according to the survey median.

Producers paid 7.2 percent more for goods from May 2007, compared with a 6.5 percent gain in the 12 months ended in April. Excluding food and energy, the increase was 3 percent from a year earlier, the same as in the prior month.

Food was 0.8 percent more costly, after no change the previous month. Pork prices increased by the most since 1999.

Producers paid 9.3 percent more for gasoline, the biggest increase since November, and diesel fuel gained 11.2 percent, the report showed. Natural gas costs were up 5.7 percent from the previous month.

The wholesale-price report is based on figures for the Tuesday of the week that includes the 13th of the month. On that basis, crude oil cost about $12 a barrel more in May on the New York Mercantile Exchange than the prior month. Oil futures prices reached a record $139.89 a barrel yesterday.

Raw Materials Prices

Costs of intermediate goods, those used in earlier stages of production, rose 2.9 percent, after a 0.9 percent gain in April. They increased 12.6 percent from a year ago.

Excluding food and energy, intermediate prices gained 2 percent.

Prices for raw materials, or so-called crude goods, increased 6.7 percent, after a 3.2 percent rise the prior month.

``Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand,'' Fed Chairman Ben S. Bernanke said in a speech this month. ``However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention.''

Today's report showed passenger car prices fell 1 percent and light trucks dropped 0.9 percent.

Capital, Consumer Goods

The report showed prices for capital equipment increased 0.1 percent. Consumer goods prices rose 1.8 percent. Civilian aircraft prices were up 1.1 percent, the most since August 2004.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. Consumer prices rose 0.6 percent in May, more than forecast and the most since November, while import costs rose less than projected by economists.

Some companies are trying to recoup expenses. Dr Pepper Snapple Group Inc., the beverage company spun off by Cadbury Schweppes Plc in April, said first-quarter profit rose after it raised prices to counter soaring ingredient and fuel costs.

``Our industry, and the economy as a whole, continue to face significant headwinds especially in the area of higher commodities and fuel costs,'' Chief Executive Officer Larry Young said on a conference call this month.

Others are finding it tough to keep up with the jump in costs. FedEx Corp., the second-largest U.S. package-shipping company, in May cut its profit forecast for the second time this year after surging fuel prices raised costs by at least $100 million more than estimated. FedEx had already boosted its fuel surcharge on express shipments in early May.

``While we have dynamic fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices,'' Chief Financial Officer Alan Graf said in a statement last month.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: June 17, 2008 09:12 EDT