US producer prices surge on rising food, energy costs
Posted: 26 February 2008 2242 hrs

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

The rebound in the producer price index (PPI) burst the expectations of most economists who had only predicted a 0.4 percent gain in headline inflation. The monthly rise in wholesale inflation was the strongest since November.

The mounting costs of food and energy have caused producer prices to rocket 7.4 percent in the United States in the past twelve months to January, according to the Labour Department.

The annual spike marks the strongest gain in the PPI since October 1981.

The government snapshot showed the core PPI rate, which strips out volatile food and energy costs, increased 0.4 percent last month.

Most economists had forecast that the core rate would increase by a milder 0.2 percent.

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

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.

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 percent to 3.00 percent since September amid fears the economy could be on the verge of a recession.

But the Fed could find it harder to justify such cuts if inflation pressures continue building.

The Labour Department survey showed that food prices rose 1.7 percent last month while energy costs at the wholesale level increased 1.5 percent. The rise in food costs was the largest since October 2004. - AFP/de