April 13 (Bloomberg) -- Prices paid to U.S. producers rose more than forecast in March, led by higher energy costs that Federal Reserve policy makers say threaten to spark faster inflation.

The 1.0 percent gain followed a 1.3 percent increase in February, the Labor Department said today in Washington. So- called core producer prices that exclude fuel and food were unexpectedly unchanged after rising for four straight months.

The core figures show that so far, companies are mostly absorbing higher energy prices rather than passing them on to customers. Rising fuel prices combined with increases in labor costs that are approaching a six-year high reinforce the risk that inflation may accelerate in coming months.

``This certainly doesn't let the Fed off the hook by any means,'' said Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina. Inflation is ``not accelerating, but it's not decelerating either. It's stubbornly staying high.''

A separate report from the Commerce Department showed that the U.S. trade deficit unexpectedly narrowed in February from the previous month. The gap in goods and services trade narrowed to $58.4 billion from $58.9 billion in January.

Treasury securities reversed losses after the reports. The yield on the benchmark 10-year note, which moves inversely to price, fell to 4.73 percent at 9:07 a.m. in New York, from 4.74 percent late yesterday.

Survey Results

Economists had forecast prices paid to factories, farmers and other producers would rise 0.7 percent, according to the median of 72 estimates in a Bloomberg News survey. Estimates ranged from 0.2 percent to 1.5 percent.

Core prices were projected to rise 0.2 percent last month, with estimates ranging from no change to a gain of 0.4 percent.

Core inflation ``at least gives us a little bit of a reprieve for today,'' Martin said.

Producer prices rose 3.2 percent from March 2006, compared with a 2.5 percent gain in the 12 months ended in February. The year-over-year change in prices was the biggest since August.

Prices excluding food and energy rose 1.7 percent from a year earlier, compared with a 1.8 percent gain in the 12 months ended in February. They were projected to increase 1.8 percent from March 2006, according to the survey median.

Energy prices jumped 3.6 percent last month after increasing 3.5 percent the prior month. The price of gasoline rose 8.7 percent, the most since November, and natural gas costs increased 3.3 percent.

Oil costs have kept rising. Crude oil futures on the New York Mercantile Exchange jumped to $66.03 a barrel on March 29, the highest closing price since September.

Higher Food Prices

Today's report showed food prices rose 1.4 percent in March, after the previous month's 1.9 percent increase that was the most since October 2003. Prices of vegetables, beef and dairy products increased during the month.

Costs of intermediate goods, those used in earlier stages of production, rose 1 percent last month, after rising 1.1 percent the prior month. They were rose 3.5 percent from a year ago.

Excluding food and energy, intermediate prices rose 0.2 percent for a second month. Compared with a year ago, core intermediate goods costs rose 3.5 percent.

Prices for raw materials, or so-called crude goods, rose 3.2 percent, following an 8.9 percent jump the prior month.

Prices for passenger cars rose 0.2 percent after falling 1.2 percent the prior month. Costs of light trucks declined 1.2 percent after a 1.7 percent increase.

The report showed prices for capital equipment declined 0.1 percent last month after a 0.3 percent increase the month before. Computer prices dropped 2.6 percent, the most since October.

First of Three

The producer price index is one of three monthly inflation gauges reported by the government. A report yesterday showed prices of goods imported into the U.S. last month rose 1.7 percent, the most in almost a year, reflecting higher energy costs. The report also showed that imported consumer goods prices excluding vehicles rose 1.8 percent from March 2006, the biggest year-over-year rise since January 1996.

The Labor Department is forecast to report on April 17 that its consumer price index rose 0.6 percent March after a 0.4 percent gain in February, while core inflation held at 0.2 percent, according to a Bloomberg survey median.

Preferred Gauge

For almost three years, the Fed's preferred inflation measure has been at or above the top of its comfort zone of a 1 percent to 2 percent gain cited by several policy makers including Chairman Ben S. Bernanke.

Fed officials, who kept the benchmark overnight lending rate at 5.25 percent for a sixth straight meeting, said inflation remained the ``predominant concern,'' and the ``prevailing level of inflation remained uncomfortably high,'' according to minutes of the March 20-21 meeting released this week.

``Further policy firming might prove necessary to foster lower inflation,'' Fed officials said in the minutes. ``Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected.''

Companies usually try to absorb higher materials costs before considering raising prices that could jeopardize their sales, economists said.

Cost Pressures

``Industries continue to suffer from significant cost pressures, but emerging slackness in many markets for final products will limit their ability to pass on effective price increases,'' said Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts.

After struggling with higher fuel prices the past few months, carriers including Delta Air Lines Inc., AMR Corp.'s American Airlines, UAL Corp.'s United Air Lines, Northwest Airlines Corp. and US Airways Group raised fares by $5 per flight in March.

Steelmakers expect to benefit as lower steel inventories help prices to rebound from a 17-month low posted in February. AK Steel Corp. last month said it will raise prices for a third time this year. Nucor Corp. said that improved prices and demand will boost its first-quarter profit, and Steel Dynamics Inc. increased its first-quarter net income forecast.

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

Last Updated: April 13, 2007 09:14 EDT