10:13 AM
Producer prices up, inflation still seen muted
Addison Ray
By Lucia Mutikani
WASHINGTON | Wed Feb 16, 2011 12:45pm EST
WASHINGTON (Reuters) - U.S. core wholesale prices rose in January at their fastest rate in more than two years, raising some concerns about inflation, but economists said the recovery was too weak for a big spike in consumer prices.
The core producer price index, which excludes food and energy costs, increased 0.5 percent, the biggest advance since October 2008, the Labor Department said on Wednesday. Economists had expected a 0.2 percent gain.
Investors viewed the figures somewhat warily and bond prices slipped. Economists, however, said it was too soon to panic about inflation with stubbornly high unemployment keeping labor costs subdued.
"The question is whether we are seeing a limited pass-through of commodity price hikes or the beginnings of an inflationary spiral," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
"Wages will be the thing to watch -- there won't be an inflationary spiral unless wage inflation picks up."
The rise in core PPI reflected a jump in drug prices, which accounted for 40 percent of the increase.
Other reports on Wednesday indicated that while growth may be quickening, the recovery remains uneven. Industrial production edged down in January and housing construction continued to bounce along the bottom. But bad weather might have distorted the industrial output data.
The U.S. dollar rose broadly, while stocks gained on above forecast results from technology bellwether Dell and a deal for Sanofi-Aventis SA to buy Genzyme Corp for $20.1 billion in cash.
NO PASS THROUGH TO CONSUMERS
The rise in core PPI comes at a time when a surge in commodity prices has caused most advanced economies to raise red flags on inflation.
The U.S. Federal Reserve has so far shown little concern about price pressures and officials have repeatedly said core consumer inflation remains too low. The central bank is widely expected to complete its planned purchases of $600 billion in government bonds to assist the recovery.
Most economists agree with the Fed's stance on prices. The government is expected to report on Thursday that core consumer prices rose 0.1 percent in January from December.
"Yes, we are seeing input prices go up, companies are seeing those, but they are having a hard time passing them on. There is still a lot of slack in the economy, whether it's high unemployment or high office vacancies," said John Canally, an economist at LPL Financial in Boston.
"The economy is 80 percent services. Economy-wide, raw materials or commodity prices only account for something like 5 percent of input costs and labor is 70 percent."
INDUSTRIAL OUTPUT DIPS
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