WASHINGTON, Feb 18 (AFP) - Inflation moved back to the front burner Friday after a report showing the sharpest increase in wholesale prices at the "core" rate in six years prompted a reassessment of the US economic outlook.
The Labor Department said its producer price index jumped 0.3 percent in January, while the core rate, which excludes volatile food and energy costs, soared 0.8 percent.
The core producer price index (PPI), watched closely by economists for inflationary pressures, rose at the fastest pace in six years, according to the Labor Department report.
The headline PPI figure was in line with forecasts, but the core rate was sharply higher than the 0.2 percent expected by private forecasters.
In the past 12 months, the overall PPI was up 4.2 percent and the core PPI was up 2.7 percent, the biggest year-over-year gain in nine years.
The latest figures sparked fresh concern about inflation, which has been largely in check in recent years.
Marie-Pierre Ripert at Ixis Corporate and Investment Bank said some of the higher prices may be a result of the weaker US dollar, which raises the prices of imports.
She noted that the rise was led by a significant increase in capital equipment prices and some consumer goods prices -- in particular, cars and tobacco.
"Even if a part of the rise is linked to special factors (such as tobacco), the significant rise in core producer prices reflects a rising 'pass through' which could become a cause for concern for the Fed," she said.
"Indeed, (Fed chairman Alan) Greenspan put forward the fact that foreign exporters could begin to raise their prices in dollars in the future if the dollar declines further."
Ian Shepherdson, chief US economist at High Frequency Economics, said, however, that the report is "much less alarming" than it appears.
He said the core rate was boosted by one-time increases in alcohol and tobacco prices, which "are no indication of broad PPI pressure."
Prices for autos and trucks also jumped in January, but Shepherdson said "it is a good bet these increases won't stick."
Other experts said the figure prompts a reassessment of the economic picture.
"This is an important warning not to become complacent about the containment of inflation risks," said John Lonski, economist at Moodys Investors Service.
"Investors need to look for higher short-term and long-term interest rates in the months ahead."
Lonski said he expects "a mild rise in inflation that will guide interest rates higher," and sees consumer prices at the core level rising at 2.4 percent pace by December.
Joel Naroff at Naroff Economic Advisors said the jump in wholesale prices may not immediately move to the consumer level. But he said the low-inflation party appears to be over.
"The pathway from wholesale prices to retail prices is hardly direct," he said.
"Yet the constant pressure on producer costs at all levels has to be giving firms fits and causing them to look for any way possible to pass on those higher prices. With the weak dollar hitting import prices, the underlying trend in inflation is not pretty. I would be very surprised if the Fed's central tendency forecast of less than two percent core inflation will occur."
02/18/2005 15:56 GMT - AFP