Gas Prices Fuel Surge in Producer Prices

By Lucia Mutikani

WASHINGTON -- U.S. producer prices recorded their largest increase in six months in December as the cost of gasoline rebounded strongly, but inflation pressures remained benign.

The Labor Department said Wednesday its seasonally adjusted producer price index rose 0.4 percent last month, the biggest rise since June, after slipping 0.1 percent in November.

December's rise in prices received by the nation's farms, factories and refineries ended two straight months of declines and matched economist expectations. In the 12 months through December, producer prices increased 1.2 percent after advancing 0.7 percent in November.

Wholesale prices excluding volatile food and energy costs increased 0.3 percent, the biggest gain since July 2012, after ticking up 0.1 percent the prior month. However, tobacco accounted for nearly half the increase.

In the 12 months through December, the so-called core PPI rose 1.4 percent after increasing 1.3 percent in November.

U.S. Treasury debt prices fell on the report, while U.S. stock index futures and the dollar were little changed.

A separate report showed manufacturing activity in New York state jumped to its highest level in 20 months in January as new orders soared.

The New York Federal Reserve's "Empire State" general business conditions index rose to 12.51 in January from a revised 2.22 in December to hit its highest since May 2012. %VIRTUAL-article-sponsoredlinks%Economists polled by Reuters had expected a reading of 3.75.

New orders rose to 10.98, a two-year high according to the New York Fed, from a revised -1.6.

While economic activity has picked up, inflation continues to run very low because of labor market slack.

That could see the Federal Reserve keeping interest rates near zero for a while. The U.S. central bank has started scaling back its monetary stimulus, reducing its monthly bond purchases to $75 billion from $85 billion starting this month.

"I think the Fed still thinks inflation is too low," said Gus Faucher, senior economist with PNC Financial Services in Pittsburgh. "That said [policymakers] will still reduce their asset purchases by $10 billion to $15 billion at the end of the month. We are see underlying growth at 3 percent and that's better than what we've had," he added.

The Fed's policymaking group meets on Jan. 28-29.

Consumer inflation data Thursday is expected to show prices rising in December, according to a Reuters survey. Still, inflation remains below the Fed's 2 percent target.

Last month, wholesale gasoline prices rose 2.2 percent, accounting for more than half of the increase in the energy index, which was up 1.6 percent.

Wholesale food prices fell 0.6 percent in December after being flat the prior month. Food prices were held down by the cost of pineapples, which recorded their biggest drop since May 2006. Pork prices also weighed, dropping by the most since September 2012.

Tobacco prices rose 3.6 percent. Passenger car prices, which rose 0.2 percent, and light truck prices, which advanced 0.5 percent, also helped to lift the core PPI.