Analysts say rise in wholesale inflation won't last

Evidence that the economic rebound could eventually raise inflationary pressures emerged in a report Tuesday that wholesale prices surged last month.

Most economists aren't worried, though. They think the economy remains too weak for the price increases to last.

The Federal Reserve began a two-day meeting Tuesday and is likely weighing the bigger-than-expected wholesale inflation. Should inflation pressures mount, the central bank could be forced to start raising interest rates sooner than expected.

But Fed policymakers aren't likely to raise a key rate at the end of their meeting Wednesday. The Fed has kept rates at record lows to bolster the shaky recovery.

The economy is growing steadily but slowly. The latest sign was a report Tuesday that industrial production rose a better-than-expected 0.8 percent in November. Still, analysts said industrial spare capacity remains so large and demand still so soft that inflation is likely to remain tame.

Some noted that oil prices have fallen about 10 percent since the start of the month. And the higher core rate of wholesale inflation last month was driven by price increases for light trucks, which may be a temporary factor reflecting a shift to new 2010 models.

"Despite today's nasty numbers, the chances of runaway inflation remain small," Paul Dales of Capital Economics said in a research note.

Throughout the economy, few companies have much pricing power in the face of budget-conscious consumers. Kroger Co., for example, posted a lower quarterly profit in part because it's had to cut prices to compete even as its costs have risen.

And higher retail prices for gasoline have proven unsustainable. Valero Energy Corp., the nation's largest oil refiner, shuttered a major refinery over the summer. And it plans to close its Delaware City oil refinery.

Retail gas prices peaked at $2.69 in late October and have been falling steadily ever since.

Stronger activity at mines led last month's increase in industrial production, rising 2.1 percent. The manufacturing sector - the biggest chunk of industrial output - rose 1.1 percent. Utilities fell 1.8 percent, according to the Fed report.

The portion of industrial capacity in use rose to 71.3 percent, from 70.6 percent in October. It shows that factories, mines and utilities are using more of their plants as the recovery takes root. But capacity use remains far below the 80 percent level that existed for part of the past decade.

Wholesale prices jumped 1.8 percent in November, the Labor Department said. That's more than double the 0.8 percent gain analysts had expected. Core inflation, which excludes energy and food, rose 0.5 percent, the sharpest increase in more than a year.

Over the past 12 months, wholesale prices have risen 2.4 percent, the biggest gain over an annual period since October 2008. Wholesale prices had been negative compared with year-earlier levels for 11 straight months.

Consumers without jobs or worried about losing them are holding back spending. Unemployment dropped slightly in November to 10 percent, from a 26-year high of 10.2 percent. But analysts say it will resume rising in coming months, further dragging on economic growth. High unemployment has kept a lid on prices as workers wary of layoffs have moderated wage demands.

Wholesale energy prices jumped 6.9 percent in November, the biggest surge since August. Gasoline prices rose 14.2 percent. And the cost of home heating oil jumped 18.3 percent last month.

Still, oil prices have been falling in recent days, hovering around $70 per barrel. That's down from a 2009 high of $82 per barrel hit in October.

Food prices rose 0.5 percent at the wholesale level last month, following a1.6 percent rise in October.

A 4.2 percent increase in the cost of light trucks and sport utility vehicles led the gain. The cost of cigarettes rose 2.6 percent.

The Producer Price Index reflects price pressures before they reach the consumer. The government will release its look at consumer prices on Wednesday. Economists say they will show a more moderate gain of 0.4 percent, with core consumer prices expected to rise 0.1 percent.