Wholesale prices in the U.S. surged 1.8 percent in November — more than twice what analysts predicted — fueling inflation worries as the Federal Reserve began a two-day meeting in Washington. But analysts said the economic recovery is still too weak to cause the central bank to raise interest rates.
The Labor Department's Producer Price Index released Tuesday showed gains were largely driven by huge increases in energy prices, which jumped 6.9 percent. Core inflation, excluding volatile energy and food prices, rose 0.5 percent during November. It was the biggest increase in more than a year.
"What we're seeing is exactly what those tea leaves have told us is coming — that is that we're going to see a little upward pressure on prices," said economist Hugh Johnson, chairman of Albany, N.Y.-based Johnson Illington Advisors LLC.
Economists had predicted the PPI would rise 0.8 percent after a 0.3 percent gain in October.
Industrial Output Grows
In a separate report, industrial production rose a promising 0.8 percent in November, signaling that the economic recovery is taking hold in some parts of the economy. The Federal Reserve's report on activity at factories, mines and utilities showed output was up in nearly every sector surveyed after holding steady in October.
Increased production at U.S. mines led the increase, rising 2.1 percent last month. Factory output also made a strong showing with a 1.1 percent increase. Utilities showed a decrease, falling 1.8 percent largely because of unusually warm weather.
Over the past 12 months, wholesale prices have seen a 2.4 percent increase — the biggest gain in more than a year.
Fed Policymakers Review Rates
Fed policymakers will likely consider the reports during meetings Tuesday and Wednesday. The Fed cut interest rates to record low levels near zero last year in a move designed to support economic recovery and lift the nation out of recession. Because of inflation worries, officials could increase interest rates at the end of their meeting, but most economists doubt that will happen.
"I don't think that that means they're going to raise rates. I don't think they're going to materially change the statement that accompanies their decision. But at the same time, they're obviously going to be a little bit troubled by this number," Johnson said.
Alan Levenson, chief economist at T. Rowe Price in Baltimore, said the Fed will want to see more evidence that the economy is recovering before increasing rates — in particular, a resumption in job growth.
"Beyond that, it'll be a combination of waiting for the unemployment rate [to decrease] and watching signals from the asset markets," Levenson said.
A Focus On Jobs
Unemployment dropped slightly in November to 10 percent, from a 26-year high of 10.2 percent a month earlier.
Levenson predicted that there would be some job growth beginning in February, but the unemployment rate would likely keep rising until sometime in the second quarter.
Meanwhile, the House is trying to pass a jobs bill in an effort to put more Americans back to work. The bill would include money for highway construction projects and would provide money to states in an effort to keep teachers, police officers and other government employees from being laid off because of budget constraints.
House Majority Leader Steny Hoyer (D-MD) said the $75 billion bill would be paid for with money left over from the $700 billion financial bailout. Lawmakers also aim to extend unemployment insurance and food stamps for people who are struggling with the worst economic downturn since the 1930s.
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