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US producer prices surge on rising food, energy costs PDF Print E-mail
Friday, 29 February 2008

Agence France-Presse . Washington

US inflation at the wholesale level surged a stronger-than-expected 1.0 per cent in January due to rising food and energy prices, a government report showed Tuesday.

The rebound in the producer price index burst the expectations of most economists who had only predicted a 0.4 per cent gain in headline inflation.

The monthly rise in wholesale inflation, which tracks prices paid at the farm gate and for goods coming off the factory floor, was the strongest since November.

The accelerating costs of food and energy have caused producer prices to rocket 7.4 per cent in the United States in the past twelve months to January, according to the Labor Department. The annual spike marks the strongest gain in the PPI since October 1981.

'Months of surging energy prices appear now to be trickling up the production chain to finished goods prices,' said Kenneth Beauchemin, an economist at Global Insight. The US central bank has slashed borrowing costs in a bid to shore up slowing economic growth, but economists say inflationary pressures could hamper the Federal Reserve's rate-cutting campaign. A sustained jump in producer prices could make it harder for the Federal Reserve to continue lowering borrowing costs as interest rate cuts could fuel fresh price hikes.

The government snapshot also showed the core PPI rate, which strips out volatile food and energy costs, increased 0.4 per cent last month. Most economists had forecast that the core rate would increase by a milder 0.2 per cent.

Headline inflation rebounded strongly in January after falling 0.3 per cent in December while the core rate picked up following a rise of 0.2 per cent in the last month of 2007.

Many economists expect the Fed to cut its short-term benchmark federal funds rate by 50 basis points at a policy meeting next month. Fed policymakers have aggressively slashed the rate from 5.25 per cent to 3.00 per cent since September amid fears the economy could be on the verge of a recession.

The Fed could find it harder to justify such cuts if inflation pressures continue building, but some economists say the Fed hopes slowing economic growth will temper price increases.

'The Fed is increasingly in a bind with rising inflation readings. Their belief is that below trend growth will dampen much of the price pressures in the US,' said Stephen Gallagher, an economist at Societe Generale.

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