Producer prices surge, but core muted

By Alister Bull

WASHINGTON (Reuters) - U.S. producer prices rose a larger-than-expected 1.1 percent in September on rebounding energy prices, Labor Department data on Friday showed, but a key measure of core inflation at the producer level rose by a slight 0.1 percent.

Core producer prices, which strip out volatile food and energy costs, had been forecast to increase by 0.2 percent, following a 0.2 percent rise in August. On a year-on-year basis, core producer prices were up 2.0 percent.

The muted performance from core producer prices will be a consoling note for the inflation-wary Federal Reserve.

Policy-makers are pondering the balance of risks from inflation pressures and from the fallout on economic growth from an August financial markets crisis and slumping housing market.

"The PPI number looks fairly benign. As long as the big headline number doesn't feed into core, people aren't going to get too worried," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

For overall producer prices, it was the largest gain since February, when they were up 1.2 percent. The data handily outstripped economists' forecasts for prices paid at the farm and factory gate to rise 0.4 percent last month after a 1.4 percent drop in August.

Economists had also anticipated a rebound in energy prices after the previous month's steep 6.6 percent fall. Energy prices rose 4.1 percent, notching the sturdiest increase since November 2006, when they were up 5.4 percent.

The U.S. central bank holds its next scheduled interest rate meeting on October 30-31. The market is divided on the odds of a cut in the federal funds rate by a quarter percentage point, after the Fed's unexpectedly bold half percentage point ease to 4.75 percent last month.

At the earlier stages of processing, prices producers received for intermediate goods increased by 0.4 percent after a 1.2 percent drop in August, while the crude goods index rose 0.1 percent after a 3.0 percent fall the previous month.