Feb. 26 (Bloomberg) -- Prices paid to U.S. producers rose more than twice as much as forecast in January, pushed up by higher fuel, food and drug costs, signaling inflation may keep accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in December, the Labor Department said in Washington. The median forecast in a Bloomberg News survey of economists was for a 0.4 percent gain. Excluding food and energy, so-called core wholesale prices climbed 0.4 percent, the most in almost a year.

Combined with figures showing consumer prices also rose more than forecast, today's report may prompt the Federal Reserve to consider raising interest rates as soon as the economy stabilizes. Fed officials, including Governor Frederic Mishkin yesterday, have warned that higher prices may stoke inflation expectations.

``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

As consumer and wholesale prices climb, home values continue to slump. House prices in 20 U.S. metropolitan areas fell in December by 9.1 percent from a year before, the most in the 20-year history of the S&P/Case-Shiller index, a private report showed today.

Financial Markets

Treasury securities slid after the report, before recouping most of the losses later. Ten-year note yields rose as high as 3.93 percent, from 3.90 percent late yesterday. Stock futures dropped, with contracts on the Standard & Poor's 500 index losing 0.2 percent at 9:02 a.m. to 1,368.50.

Over the past 12 months, producer prices rose 7.4 percent, the most since October 1981. Wholesale prices excluding food and energy advanced 2.3 percent in the year through January.

The median forecast was based on 70 estimates. Projections ranged from a 0.3 percent decline to a 1.2 percent increase.

Core prices were expected to advance 0.2 percent, according to the survey median. Estimates ranged from no change to an increase of 0.5 percent.

Energy costs increased 1.5 percent after falling 3 percent in December. The price of gasoline rose 2.9 percent.

Food Costs

Food prices climbed 1.7 percent, the most since October 2004. Crude food prices, which cover costs of corn and wheat, increased 2.7 percent.

Kellogg Co., the largest U.S. cereal maker, last week affirmed its 2008 profit forecast after boosting prices to counter rising wheat and energy costs.

``Unprecedented commodity and energy inflation'' forced Battle Creek, Michigan-based Kellogg to raise prices, Chief Executive Officer David Mackay said at conference in Boca Raton, Florida. The increases were ``across our global portfolio and across almost all segments.''

The cost of prescription and over-the-counter medicines rose 1.5 percent, the most since May 2006. A study by economists for the government's Medicare program showed today that health- care costs will probably outpace economic growth by about 2 percentage points a year in the coming decade.

Inflation Reports

The producer price index is the last of three Labor reports on inflation for January. Consumer prices last month rose a greater-than-forecast 0.4 percent for a second month, figures showed on Feb. 20. Prices of goods imported into the U.S. rose 1.7 percent, pushing the 12-month gain to a record on higher fuel costs, the department said Feb. 15.

Recession concerns are prompting Fed policy makers to look beyond the increases in inflation and lower rates to spur lending and growth. Investors are betting policy makers will cut rates half a point to 2.5 percent at their March 18 meeting.

The Fed will ``act in a timely manner as needed to support growth,'' Fed Chairman Ben S. Bernanke told Congress on Feb. 14. ``The outlook for the economy has worsened in recent months, and the downside risks to growth have increased.''

Mishkin, who has collaborated with Bernanke on research, said in Greenville, North Carolina, yesterday that stable public expectations for inflation are ``critical'' in giving the Fed the flexibility to lower interest rates.

The U.S. has moved closer to a recession in recent weeks, with payrolls shrinking, manufacturing stalling and the housing market showing no sign of recovery. At the same time, some Fed officials also considered that a reversal of recent rate cuts may be needed once the economy stabilizes, minutes of the Fed's two January meetings showed last week.

Growth Forecasts

Economists surveyed by Bloomberg in the first week of February forecast growth would slow to a 0.5 percent annual pace this quarter and said odds of a recession this year were even.

Still, commodity price pressures are mounting. Producer prices for all crude goods increased 2.5 percent in January. The cost of intermediate goods, such as steel used in earlier stages of production, rose 1.4 percent last month.

Producer prices and consumer prices 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.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: February 26, 2008 09:28 EST