U.S. wholesale prices outside of food and fuel rose at the fastest pace in six months in July as costs for tobacco and light trucks jumped, but weak consumer demand was seen keeping inflation in check at the factory gate.
Both producer and consumer inflation rose earlier this year as food and energy prices rose as revolutions in the Middle East pushed up oil prices, but underlying or core inflation, excluding food and energy costs, remained subdued.
The Federal Reserve, which focuses on core inflation trends, last week promised to keep interest rates near zero for the next two years to stimulate growth, saying the outlook for inflation over the medium-term was subdued.
The Labor Department said on Wednesday its seasonally adjusted index for prices paid at the farm and factory gate, excluding food and energy, rose 0.4 percent -- the largest increase since January -- after rising 0.3 percent in June.
Economists, who had expected a 0.2 percent rise last month in the so-called core rate, said July's gain should not alter the Federal Reserve's prediction of low inflation in the near-term.
In the 12 months to July, core producer prices increased 2.5 percent, the largest rise since June 2009, but producers' pricing power is limited by a 9.1 percent unemployment rate.
There is a high level of unemployment and low level of capacity utilization, said Christopher Probyn, chief economist at State Street Global Advisors in Boston. I don't think that the U.S. economy is in a position to generate a sustained acceleration in inflation.
Overall producer prices were bumped up by food costs, which rose 0.6 percent as potatoes recorded their biggest increase in almost a year. Gasoline prices, however, fell 2.8 percent.
In the 12 months to July, producer prices rose 7.2 percent after increasing 7.0 percent the prior month. The rise was above economists' expectations for a 7.0 percent advance.
U.S. financial markets, which are more concerned about the possibility of another recession, were little moved by the producer inflation data on Wednesday. U.S. technology shares ended down after a disappointing sales outlook from computer maker Dell. Prices for U.S. government debt rose, while the dollar fell broadly.
FED UNDER POLITICAL PRESSURE
While the Fed's forecasts for subdued inflation have so far proved correct, despite ultra-easy monetary policy, the U.S. central bank has suddenly come under harsh scrutiny from Republican campaigners for the 2012 presidential nomination who worry that near zero interest rates and the Fed's lack of transparency are a threat to national economic stability.
Texas Governor Rick Perry even suggested on Monday that Chairman Ben Bernanke's policies could be considered treasonous if the Fed prints more money between now and the election in November 2012.
The Fed has injected about $2.3 trillion into the economy through purchases of government and agency debt since late 2008, measures intended to increase credit availability, but that some see as setting the stage for future inflation.
Criticism of the Fed's policies is also coming from within. Dallas Fed President Richard Fisher said that while he had no immediate concerns about inflation, further monetary easing against the backdrop of a big budget deficit would be unwise.
I believe what is restraining our economy is not monetary policy but fiscal misfeasance in Washington, Fisher said at a community forum in Texas.
TOBACCO PRICES SURGE
Consumer inflation data due on Thursday could shed more light on the inflation picture. The core consumer price index is expected have risen 0.2 percent, slowing from June's 0.3 percent increase.
The economy hardly grew in the first half of 2011, but there are signs demand is picking up moderately.
Target Corp reported a bigger-than-expected rise in quarterly profit and forecast a more profitable year than analysts were anticipating. Other retailers, such as BJ's Wholesale Club and Staples reported results that surpassed expectations.
However, cost pressures in the pipeline are abating, with the core index for intermediate goods rising by the least amount since September.
But some economists cautioned that regardless of anemic demand, the Fed could find itself with an inflation problem.
Producer expenses are on the rise and while weak demand may limit pricing power, the pressure on costs will cause firms to look for any way possible to pass on those increases, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
In Wednesday's data, tobacco costs surged 2.8 percent, the largest increase since March 2009, and accounted for a nearly a quarter of the rise in the monthly core PPI rate. Economists said the jump was likely seasonal and expected a moderation in the coming months.
Light truck prices increased 1.0 percent, still reflecting the lingering effects of disruptions to production caused by the March earthquake in Japan.
However, motor vehicle production rebounded strongly in July, which should help to ease the price pressure.
(Additional reporting by Ann Saphir; Editing by Andrea Ricci)