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Producer prices leap 1.4% in May

June 18, 2008|Jeannine Aversa | The Associated Press

WASHINGTON — Wholesale prices bolted ahead in May at the fastest pace in six months as energy and food costs marched higher.

The Labor Department reported Tuesday that its producer price index, which measures the costs of goods before they reach store shelves, shot up 1.4% in May. That was up from a modest 0.2% rise in April and marked the biggest increase since November.

Stripping out energy and food prices, which can swing widely from month to month, the "core" rate of inflation rose 0.2% in May, an improvement from the prior month's 0.4% increase. That suggested other prices were better behaved.

The overall inflation rate of 1.4% was higher than the 1% rise many economists were forecasting. But the increase in core prices matched their expectations.

Meanwhile, a report from the Federal Reserve showed that industrial production declined in May, underscoring the strain on factories from the deep housing slump.

Output at the nation's factories, mines and utilities fell 0.2% in May after a 0.7% decline in April.

The manufacturing report disappointed economists, who were forecasting a tiny 0.1% increase.

In other economic news, the Commerce Department reported that the number of housing starts in May fell by 3.3% to a 975,000 annual pace -- the lowest in 17 years -- as builders pulled back further given the market's deep slump.

And the deficit in the broadest measure of trade, called the current account balance, increased to $176.4 billion in the first quarter, up from $167.2 billion in the final quarter of last year.

The latest batch of economic reports underscores the challenges facing the country as well as Federal Reserve policymakers: plodding economic growth coupled with rising energy and food prices that raise fears of spurring an inflation outbreak.

"Housing and manufacturing are still drifting lower, while prices are moving higher," said Ken Mayland, president of ClearView Economics.

On the inflation front, energy prices jumped 4.9% in May, also the biggest rise since November. Diesel fuel prices surged 11.2%, gasoline prices were up 9.3% and home heating oil increased 8%.

Food prices also rose sharply. They increased 0.8% in May, after being flat in April.

In May prices for pork went up 8%, the most since September 1999. Prices for fruits rose 5.9%, the most since December.

Prices for beef and veal, natural cheese and certain confectionary goods also posted sizable increases.

There are fears that eventually these energy and food costs will force companies to boost prices for other goods and services, spreading inflation through the economy.

Given those concerns, many economists believe the Federal Reserve will hold interest rates steady at 2%, a four-year low, when it meets next week.

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