Washington, DC, May 13--U.S. inflation in the production pipeline stayed mild last month despite strong economic growth, validating the Federal Reserve's view that it will not need to raise interest rates rapidly this year.
The producer price index for finished goods rose 0.7% in April, the fastest clip in a year, the Labor Department said Thursday. But the surge was mostly due to sharply higher energy prices. The more closely watched "core" index, which excludes food and energy items, rose just 0.2%, the same rate as in March.
The size of the overall increase surprised Wall Street, although the rise in the core index matched expectations precisely. The average forecast of economists surveyed by Dow Jones Newswires and CNBC had called for a 0.3% increase in the overall index. The report was consistent with other recent measures of inflation, which have shown prices rising slowly but steadily.
Economists say the PPI, which reflects prices paid by factories, mines and utilities, can foreshadow changes in consumer prices about six months down the road. Investors pay close attention as a result. But Fed policymakers have said they expect consumer prices to remain mild this year, giving them the freedom to raise interest rates at a gradual pace.
In its report Thursday, the department said the acceleration in overall producer prices could be "traced" to a surge in energy prices, which climbed 1.6% after 0.6% gain in March. But for energy prices, the index would have risen just 0.5%. Food prices rose 1.4%, boosted in part by 10.4% increase in dairy prices that was the largest since the summer of 1946.
Prices of capital equipment were unchanged after rising 0.3% in March. Passenger-car prices fell for the first time this year, dropping 0.2%. Computer prices continued to decline, falling 1%. But prices of alcoholic beverages rose 3.5%, the biggest increase in 13 years. Prices of tobacco products rose 0.4%, the biggest gain since October.
Inflationary pressures grew in annual terms. In the 12 months that ended April, producer prices were up 3.7%--but still below the recent peak of 4% reached in December. The core index was up 1.5% in annual terms, marking the highest rate since the summer of 2001.
Further up the production pipeline, prices of crude, or unprocessed goods, rose 3%, the biggest gain in four months. Prices of intermediate goods rose 1.4%, twice the rate in March.
