Wholesale inflation rises

Inflation at the wholesale level edged up by the smallest amount in five months in July as falling food prices helped offset another rise in energy costs.

The Labor Department reported that wholesale prices increased a slight 0.1 percent in July, far below the 0.5 percent jump in June. The improvement reflected a retreat in food prices, which fell by 0.3 percent in July, after having surged by 1.4 percent in June, which had been the biggest increase in nearly two years.

Federal Reserve policy-makers broke a two-year string of interest rate increases last week, saying they believed that a slowing economy would help restrain inflation pressures. But some private economists are worried that the relentless rise in energy costs could force the Fed to resume rate increases in coming months.

The 0.1 percent rise in the government’s Producer Price Index represented the smallest amount of inflation since wholesale prices actually fell by 1.2 percent in February.

Excluding volatile food and energy, core wholesale inflation fell by 0.3 percent in July. That was the best showing for core inflation in nine months, since a similar 0.3 percent decline last October.

Price pressures have been accelerating this year as energy costs have soared, reflecting rising tensions in the Middle East and tight supplies because of increased demand from emerging economies such as China.

Crude oil hit a record high, closing at $77.03 in New York trading on July 14. The increases in crude prices have pushed gasoline costs above $3 per gallon in many parts of the country, increases that have spurred rising voter unhappiness with the economic policies of the Bush administration.

For July, energy prices were up 1.3 percent, the biggest increase since a 4 percent jump in April. Gasoline prices were up 0.7 percent, natural gas for home use was up 0.9 percent and residential electricity costs jumped 1.8 percent, the biggest increase since January.

Those higher energy costs were expected to show up quickly in higher consumer energy bills. Analysts were forecasting that the Consumer Price Index would register a 0.4 percent increase for July when that figure is released on Wednesday.

Analysts are worried that rising inflation pressures may force the Fed off hold and result in further interest rate increases in coming months.

The 0.3 percent drop in food costs reflected a retreat in a variety of food costs which had surged in June. Egg prices fell by 26.1 percent, the biggest one-month drop in six years while fish prices were down 9.1 percent and soft drink prices dropped by 1.4 percent.

Outside of food and energy, prices were mostly lower with some notable exceptions. Tire prices jumped 3.5 percent, the biggest one-month gain in 27 years.

Offsetting that increase, the price of newspapers dropped by 1.2 percent, the biggest decline in 13 years, while the cost of light trucks was down 3.1 percent and the price of passenger cars fell by 0.8 percent.

Copyright © 2006 The Associated Press