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PPI rises 0.9% on higher food, energy prices...

Core rate of wholesale inflation up 0.2% in December...

By Rex Nutting, MarketWatch
Last Update: 8:50 AM ET Jan 17, 2007

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WASHINGTON (MarketWatch) -- Prices paid to U.S. producers rose 0.9% in December, led by higher energy costs and a big jump in fresh food prices, the Labor Department reported Wednesday.
The core producer price index, which excludes food and energy prices, rose 0.2%.

The increases in wholesale inflation were slightly higher than expected. Economists surveyed by MarketWatch were looking for a 0.6% gain on the finished goods PPI and a flat reading on the core PPI.

Treasury prices were little changed after the report.

Energy prices surged for a second straight month after falling the three months previous. Energy prices rose 2.5% in December, with wholesale gasoline prices rising 7.1%.

Wholesale food prices rose 1.7%, the largest gain in more than three years. Fresh fruit prices jumped 26.3%, the most in six years, while fresh vegetable prices rose 21.7%.

The PPI rose 1.1% in 2006, little changed from the 0.9% gain in the 12 months ending in November. The PPI rose 5.4% in 2005, as energy prices surged. The core PPI has risen 2% in the past 12 months, up from 1.6% in 2005.

For the first time in several months, vehicle prices had little impact on the PPI in December. Light truck prices rose 0.7%, while car prices fell 0.2%. In November, soaring vehicle prices (likely related to seasonal adjustments) helped push the PPI up 2% and the core PPI up 1.3%.

The report shows relatively tame price pressures outside of energy. The report is not likely to sway Federal Reserve policymakers either way as they consider possible changes to monetary policy at the Federal Open Market Committee meeting in two weeks.

Most observers expect the FOMC to hold tight on interest rates in January and probably in March as well. Expectations for aggressive rate cuts by the Fed have faded in recent weeks as growth has come in stronger than expected. Fed officials still maintain that worrisome inflation is the greater threat to a stable economy than is the risk of a severe slowdown in growth.

The government will report on the more important consumer price index on Thursday, with economists expecting a 0.5% rise in the CPI and a 0.2% gain in the core CPI after both figures turned in flat readings in November.

The government takes the temperature of inflation at three separate stages along the production process: crude materials, intermediate goods and finished goods. The finished goods PPI is the main number that economists and markets focus on.

At the finished goods level, prices of consumer goods rose 1.2%, while capital goods prices rose 0.2%.

Price pressures were mixed further back in the production pipeline. Intermediate goods prices rose 0.5% in December, fueled by a 2.3% rise in energy prices. Core intermediate goods prices (which exclude food and energy prices and which are some of the Fed's favorite measures of underlying inflation) fell 0.1% in December and are up 4.7% in the past 12 months. Steel prices fell 6.3%, while plastic prices dropped 2.7%.

Crude goods prices rose 2.9%, as energy prices rose 5.5%. Basic industrial materials prices rose 1%. Iron and steel scrap prices rose 6.8%, while iron ore prices fell 5.8%, the biggest drop in 20 years.

Rex Nutting is Washington bureau chief of MarketWatch.