(Updates with closing market levels)
* 12-month core producer price gain is biggest since 1991
* April PPI up 0.2 percent, core up 0.4 percent
* Bigger-than-expected core price gain hits stocks
* Spike in pipeline inflation problem for Fed
By Alister Bull
WASHINGTON, May 20 (Reuters) - U.S producer prices excluding energy and food rose at their fastest pace since 1991 in the year to April, highlighting inflation concerns that may limit the Federal Reserve’s options to support a weak economy.
The Fed — the U.S. central bank — has been counting on slower growth to stop soaring fuel and food costs spilling into wider inflation but data released on Tuesday on prices paid at the farm and factory gate suggest that battle is not yet won.
The Labor Department said the Producer Price Index rose 0.2 percent last month as food prices took a respite from their march upward and as gasoline costs, which usually climb sharply in April, fell after adjustment for seasonal swings.
However, core producer prices, which strip out volatile energy and food costs, increased by 0.4 percent — twice the rate forecast on Wall Street.
Over the past 12 months, core prices have risen 3 percent, the largest gain since December 1991. Overall producer prices were up an even stiffer 6.5 percent.
U.S. stock prices fell as investors, already alarmed by a fresh record oil price CLc1 notched on Tuesday near $130 per barrel, took further fright over the high core price gauge.
The Dow Jones Industrial Average .DJI closed down almost 200 points or more than 1.5 percent in New York.
“Nothing here bodes well for consumers,” said Joel Naroff, president at Naroff Economic Advisors in Holland, Pennsylvania, adding: “It’s putting more pressure on businesses to raise their costs. This is problematic in an economic slowdown.”
Soaring energy costs have buoyed producer prices and spilled into broader measures of inflation in a worrying fashion for the Fed, which has slashed benchmark interest rates by 3.25 percentage points since mid-September to buffer the economy from a lingering housing crisis and credit crunch.
Fed Vice Chairman Donald Kohn said in New Orleans on Tuesday rising inflation expectations were a concern but that the economy was still dogged by the housing slump, creating a high level of uncertainty that demands policy flexibility.
The Fed is widely expected to hold U.S. target overnight rates steady at 2 percent at its next monetary policy meeting in late June but financial markets see some chance policy-makers will push borrowing costs higher by year-end.
The rise in the core producer price index reflected increases in a broad range of costs, including auto prices.
Gasoline prices fell 4.6 percent in April but they were up 23 percent over the past year. Seasonal factors aided the April drop, which economists warned would prove temporary.
While food prices were unchanged, the price of rice jumped 17.4 percent, the largest rise since 1993.
The report suggested price pressures further back in the chain of production, with core crude goods up 7.9 percent.
“Perhaps the most disturbing aspect of the PPI report was the surge in pipeline costs,” said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.
Other data on Tuesday showed consumers feeling the pinch of record gasoline prices, with one measure of chain store sales recording its third straight week of declines.
Target Corp (TGT.N), the No. 2 U.S. discount chain, reported lower quarterly profits as customers cut back on clothes and jewelry in favor of basics like food, while Home Depot’s (HD.N) quarterly profit fell 66 percent as housing sector woes hurt sales.
A report from the Chicago Federal Reserve Bank showed weaker economic activity in April across a range of sectors. Its National Activity Index, compiled from an array of economic data, moved down to -1.17 from -0.98 in March.
A three-month moving average of the index tumbled to its lowest since November 2001, when the United States emerged from its last recession, and showed the economy could be contracting for a fifth straight month. (Additional reporting by Ros Krasny in Chicago and Ellen Freilich and Richard Leong in New York; Editing by James Dalgleish)