Oct. 12 (Bloomberg) -- Prices paid to U.S. producers rose in September as oil costs climbed, while core inflation was less than forecast.

The 1.1 percent increase in total producer prices followed a 1.4 percent decline in August, the Labor Department said today in Washington. The core measure, which excludes fuel and food costs, rose 0.1 percent after a 0.2 percent gain in August.

Federal Reserve officials have said they continue to monitor inflation ``carefully'' after they cut interest rates for the first time in four years last month. They said in their Sept. 18 statement that the latest figures had ``improved modestly.''

``The stronger-than-expected PPI report should add some upside risks to next week's headline CPI number,'' said Zach Pandl, economist at Lehman Brothers Holdings Inc. The Labor Department next week reports on the consumer price index.

Another government report today added to evidence that consumer demand will help the economy avoid a recession. Retail sales increased 0.6 percent in September, more than forecast, following a 0.3 percent gain the prior month, the Commerce Department said. Purchases excluding automobiles rose 0.4 percent.

The yield on the benchmark 10-year note rose to 4.70 percent at 8:57 a.m. in New York, from 4.64 percent late yesterday.

Economists had forecast producer prices would rise 0.5 percent, according to the median of 73 projections in a Bloomberg News survey. Estimates of the increase ranged from 0.2 percent to 1.2 percent. Core prices were forecast to rise 0.2 percent.

Over the past 12 months, producer prices rose 4.4 percent, compared with a 2.2 percent rise in the 12 months through August. Producer prices excluding food and energy rose 2.0 percent in the year through September.

Trading in Fed funds futures suggests investors expect the Fed to hold its benchmark lending rate at 4.75 percent at its Oct. 31 meeting, after lowering it a half point on Sept. 18 in the first cut in four years. Futures trading points to a probable quarter-point reduction at the Fed's December meeting.

Fed's Outlook

In the minutes of their September meeting, released Oct. 10, Fed policy makers signaled they were in no hurry to reduce interest rates again because they aren't convinced the U.S. economic expansion is ending.

``Further actions would depend on how economic prospects were affected by evolving market developments and by other factors,'' according to the records. Fed officials continued to express concern about inflation, citing labor costs and a weaker dollar, the minutes showed.

The Fed's preferred price gauge, which excludes food and energy costs, rose 1.8 percent in August from a year earlier, the third straight month within the 1 percent to 2 percent comfort range stated by several officials. Policy makers ``were a little more confident'' the decline ``would be sustained,'' the minutes showed.

Energy Costs Jump

The increase in wholesale prices last month was led by a 4.1 percent gain in energy costs that was the biggest since November. Costs for gasoline, natural gas, heating oil and diesel fuel all rose.

Costs of intermediate goods, such as steel used in earlier stages of production, increased 0.4 percent in September, after a 1.2 percent decline in August. They were up 4.2 percent from a year ago.

Excluding food and energy, intermediate prices rose 0.1 percent and were up 1.7 percent from September 2006.

Prices for raw materials, or so-called crude goods, rose 0.1 percent.

The cost of consumer goods rose 1.5 percent as food costs rose 1.5 percent. Prices for capital goods fell 0.1 percent.

The producer-price report is the second of three monthly inflation gauges. The government said on Oct. 11 that import prices rose 1 percent in September because of higher oil costs, while prices excluding food and energy fell 0.2 percent, the biggest decline since October 2006. Results for consumer prices will be issued Oct. 17.

Raising Prices

Faced with rising commodity costs, some companies are raising prices to maintain their profit margins.

Kimberly-Clark Corp., the maker of Huggies diapers, said Oct 9 it's raising prices in the U.S. 4 percent to 7 percent on Feb. 3 to counter higher raw material and energy costs. The increases will affect products in the company's consumer tissue and baby and childcare businesses, the Dallas-based company said in a statement.

``The increases are necessary to offset significant inflationary pressure from higher raw material and energy costs,'' the company said.

Some companies aren't passing on all their cost increases to consumers.

``We pass on a lower rate of price increases to consumers than we are feeling in our input costs,'' said Stephen Sanger, chairman of food processor General Mills Inc. yesterday at the annual Business Council meeting in Williamsburg, Virginia.

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

Last Updated: October 12, 2007 09:14 EDT