NEW YORK (CNN/Money) -
Wholesale prices posted their biggest rise in nearly 15 years in October, lifted by soaring energy costs, the government reported Tuesday, setting off inflation alarm bells just as oil prices have started retreating.
The producer price index (PPI), which measures prices before they reach consumers, leaped 1.7 percent last month, the biggest jump since January 1990, the Labor Department said. That compares with a 0.1 percent rise in September. The inflation reading came in well above even the highest forecasts on Wall Street.
Energy prices led the charge, with gasoline prices up 17 percent -- the biggest increase since June 2000 -- and home heating oil prices up 18 percent. Diesel fuel prices jumped 21 percent and jet fuel also increased 17 percent. Energy prices were up 6.8 percent overall.
But after spiking above $55 a barrel in October, crude oil prices have fallen more than $8 a barrel in recent weeks, leading many economists to predict that the rate of inflation will actually be lower in 2005 than this year.
"Even if energy hangs out at these historically high levels, headline inflation should slow down in the coming year," said Steven Wieting, senior economist at Citigroup.
That's not only due to the recent decline in oil prices, economists said. It's also because the Federal Reserve has been raising interest rates in a bid to make sure the economy doesn't start overheating.
Oil wasn't the only culprit in Tuesday's report. Food prices rose 1.6 percent, with fresh fruit prices up 11 percent and vegetable prices up 34 percent, their biggest jump in more than eight years. Economists said the aftermath of the hurricanes in Florida were partly to blame.
The so-called core-PPI, which excludes often volatile food and energy prices, rose 0.3 percent, the same as the increase in September and just a bit above economists' forecasts.
The rise in PPI means prices at the wholesale level were up 4.4 percent in October from a year earlier, versus a 3.3 percent year-over-year increase in September.
But Wieting and other economists said the jump in the PPI won't necessarily translate into significantly higher inflation at the retail level.
Economists expect an increase of 0.4 percent for the consumer price index, the government's main inflation gauge, due from the Labor Department Wednesday morning. They also forecast a 0.1 percent increase in core CPI, on average. In September, CPI overall rose just 0.2 percent while the core rate excluding food and energy costs rose 0.3 percent.
Sung Won Sohn, chief economist at Wells Fargo, also believes the inflation risk is abating, despite Tuesday's report.
"Clearly some of the earlier increases in the price of crude are beginning to percolate through the economy. We knew it was going to happen," said Sohn. "I'm reasonably sure we've seen the peak (for oil) and it's beginning to trend down and that should do a lot to decelerate inflation," he added.
Sohn and other economists said the increase in energy prices was probably working its way through the economy before October, but had not been fully captured accurately until Tuesday's report. The September PPI reading, for example, showed a 0.9 percent decrease in energy prices, despite rising crude oil prices.
Robert Brusca at FAO Economics noted that about two-thirds of the categories outside of food and energy showed actual declines or just modest price increases last month, and that many items that rose were not seasonally adjusted.
"It's a bad headline and poor core, but it's not as bad as it looks," he said.
Still, concern about inflation is one reason the Fed has been raising rates from what it considered artificially low levels, even while most measures of inflation had shown prices staying in check.
On Wall Street, stocks fell after the report.
In the Treasury market, which is typically very sensitive to inflation, bond prices edged lower, pushing the yield on the 10-year note up to 4.21 percent, from 4.18 percent late Monday, as traders bet interest rates would rise further. Bond prices and yields move in opposite directions.
Traders were betting Tuesday's PPI report increased the chance of another Fed rate hike when the central bank's policy-makers meet next month. The Fed raises rates in a bid to cool the economy and head off inflation, and cuts them to stimulate growth.
Fed funds futures contracts at the Chicago Board of Trade showed about 88 percent of traders were betting on another December rate hike, up from about 84 percent after the Fed raised short-term rates for the fourth time this year last Wednesday.