U.S. producer prices advance, but inflation still tame

WASHINGTON Wed Jan 15, 2014 2:35pm EST

1 of 2. A combine drives over stalks of soft red winter wheat during the harvest on a farm in Dixon, Illinois, July 16, 2013.

Credit: Reuters/Jim Young

WASHINGTON (Reuters) - U.S. producer prices recorded their largest gain in six months in December as the cost of gasoline rebounded strongly, but there were few signs of any sustained price pressures.

The Labor Department said on 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.

Even with the latest rise, however, prices at the wholesale level were up only 1.2 percent from a year-ago, suggesting a continued lack of pressure on the prices consumers pay.

"We are still seeing very subdued inflation pressures. The type of economic growth we see in 2014 is likely to lead to a slow normalization in consumer prices, not a fast one," said Laura Rosner, an economist at BNP Paribas in New York.

December's rise in prices received by the nation's farms, factories and refineries ended two straight months of declines and matched economists' expectations.

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. Wholesale tobacco prices typically rise in December.

Over the past 12 months, the core price index was up just 1.4 percent.

Despite an acceleration in economic activity in recent months, inflation is well below the Federal Reserve's 2 percent target. Economists say that is largely because a large amount of slack in the labor market has kept wage gains under wraps.

The Fed in a separate report on Wednesday said the economy was growing at a moderate pace and noted that prices largely remained stable, though there had been some small increases.

While the central bank plans to bring its bond-buying stimulus to an end this year, the lack of inflation should allow it to keep interest rates near zero for even longer.

"There is no reason to expect much stiffening up of price gains this year," said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

U.S. Treasury debt prices fell on the inflation data, which some traders viewed as a sign of strength in the economy, while the dollar rose against a basket of currencies. U.S. stocks pushed higher, helped by strong bank earnings.

ECONOMIC ACTIVITY PICKING UP

The economy gathered steam at the end of 2013, with solid increases in consumer spending, even though a cold snap dampened job growth in December. Some of that momentum appears to have spilled over into the new year.

The New York Federal Reserve said its "Empire State" business conditions index rose to 12.51 in January, the highest reading since May 2012, from 2.22 in December. A number above zero indicates expansion of factory activity in New York state.

Activity was boosted by a surge in new orders and a sharp improvement in labor market conditions. The survey also showed broad-based price gains in early January.

John Ryding, chief economist at RDQ Economics in New York, said the report painted a "very encouraging picture" but cautioned that it could be at odds with activity nationally.

In December, wholesale gasoline prices rose 2.2 percent, accounting for more than half of the 1.6 percent increase in overall energy prices.

Wholesale food prices fell 0.6 percent, held down by the biggest drop in pineapple prices since May 2006. Pork prices also weighed, dropping by the most since September 2012.

Tobacco prices rose 3.6 percent. Passenger car prices rose 0.2 percent and light truck prices advanced 0.5 percent, helping to lift the core price gauge.

The government is revamping its producer prices report effective with January's data and will for the first time cover service and construction products. January's report will be released on February 19.

(Reporting By Lucia Mutikani; Additional reporting by Rodrigo Campos in New York; Editing by Andrea Ricci)

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