A Big Leap for Producer Prices

The 1.4% increase, the highest in six months, is almost all fueled by gas and food

by The Associated Press

Wholesale prices bolted ahead in May at the fastest pace in six months as energy and food costs marched higher.

The U.S. Labor Dept. reported on June 17 that its Producer Price Index, which measures the costs of goods before they reach store shelves, shot up 1.4% in May. That was up from a modest 0.2% rise in April and marked the biggest increase since November.

However, stripping out energy and food prices, which can swing widely from month to month, the "core" rate of inflation rose 0.2% in May, an improvement from the prior month's 0.4% increase. That suggested that other prices were fairly well-behaved.

Industrial Production Dipped

The overall inflation rate of 1.4% was higher than the 1% rise that many economists were forecasting. But the increase in core prices matched their expectations.

Meanwhile, a report from the Federal Reserve showed that industrial production dipped in May, underscoring the strain on factories from the deep housing slump. Output at the nation's factories, mines, and utilities fell 0.2% in May, following a 0.7% decline in April.

The latest report on manufacturing activity disappointed economists. They were forecasting a tiny 0.1% rise in overall production.

Trade Deficit Higher

In other economic news, the Commerce Dept. reported that the number of new housing projects started in May fell by 3.3% as builders pulled back further, given the market's deep slump.

And, the broadest measure of trade, called the current account deficit, increased to $176.4 billion in the first quarter, up from $167.2 billion in the final quarter of last year.

Energy prices jumped 4.9% in May, also the biggest rise since November. Diesel fuel prices galloped by 11.2%, gasoline prices were up by 9.3%, and home heating oil increased by 8%.

Food prices also rose sharply. They increased by 0.8% in May, after being flat in April.

In May prices for pork went up 8%, the most since September, 1999. Prices for fruits and melons rose 5.9%, the most since December. Prices for beef and veal, natural cheese, and certain confectionary goods also posted sizable increases.

Fed May Leave Rates Unchanged

There are fears that eventually these energy and food costs will force companies to boost prices for lots of other goods and services, spreading inflation through the economy.

Given those concerns, many economists believe the Federal Reserve will hold interest rates steady at 2%, a four-year low, when it meets next week. Fed Chairman Ben Bernanke and his colleagues have signaled that the Fed's rate-cutting campaign, started last September to shore up economic growth, was over because of growing concerns about inflation.

Wall Street investors and some others predict the Fed will have to boost rates later this year to ward off an inflation flare-up. Others, however, believe the Fed will leave rates alone through the rest of this year. Raising rates too soon, they said, will hurt the fragile economy, which has pounded by housing, credit, and financial problems.

Belt-Tightening at Businesses

Soaring energy and food prices are walloping consumers and businesses alike. Last week, the government reported that consumer prices leaped by 0.6% in May, the biggest increase in six months. Those higher prices also are cutting into workers' paychecks, further straining budgets.

Businesses, meanwhile, also are tightening the belt. Employers have cut jobs every month so far this year. That's pushed the nation's unemployment rate up to 5.5% in May, from 5% in April—the biggest one-month rise in two decades.

Wholesale prices are rising faster than consumer prices because businesses—for competitive or other reasons—have been limited in their ability to pass along all of their higher costs from energy and other raw materials to customers.

Elsewhere in the wholesale inflation report, prices for light trucks dipped 0.9% and prices for cars dropped 1%. Cigarette prices rose 2.5% and airplane prices increased 1.1%, the most since August, 2004.

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