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Wholesale inflation above forecasts

Producer Price Index gain smaller than November spike, but overall and 'core' rates top forecasts.

NEW YORK (CNNMoney.com) -- Wholesale prices rose in December but at a slower pace after November's spike, the government said Wednesday, but inflation pressures were still higher than investors had been expecting.

The Producer Price Index jumped 0.9 percent last month after soaring 2 percent in November, the Labor Department reported. Economists surveyed by Briefing.com had forecast a 0.5 percent rise.

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The more closely watched core PPI, which strips out often volatile food and energy prices, edged up 0.2 percent after jumping 1.3 percent in November. Average forecasts were for a 0.1 percent rise.

The report comes a day ahead of the more important Consumer Price Index, which measures retail prices and is the government's key inflation gauge. Economists are forecasting a gain of 0.4 percent for December while the core CPI is seen up 0.2 percent. Both those measures showed no change in the November report.

Inflation is being closely watched by investors for clues as to when the Federal Reserve might feel comfortable cutting short-term interest rates.

The report showed a 2.5 percent rise in energy prices in December. That increase is probably less of a concern to economists and investors due to the recent sharp drop in oil prices so far this month. Oil prices hit a 20-month low in early trading Wednesday. And the rise in December was considerably less than the 6.1 percent rise in the November report.

"When we look at the huge reversal we've seen in energy prices recently, in the next release we're likely to see a negative number for the overall PPI" for January, said Jason Schenker, economist with Wachovia. "And the core PPI - that's not a scary number. Year over year it came in on target at a 2.0 percent rise."

Still, Schenker said the report is not good news for anyone hoping for a Fed rate cut in the first quarter of this year, or even in the first half.

"The year-over-year rise in the core is the highest number we've seen since September '05," he said. The Fed is generally believed to want to see core inflation measures rise between 1 and 2 percent on a year-over-year basis.

"That argues against a rate cut, but it's not a reason for the Fed to go out and start hiking rates," said Schenker, speaking about the 12-month change in the core PPI.

In its report, the department said food prices jumped 1.7 percent last month after rising only 0.1 percent in November. Fresh fruits and vegetable prices soared more than 20 percent. That was partly offset by a slight decrease in corn prices after big jumps for that commodity the previous two months.

The report left overall wholesale prices up 1.1 percent over the last 12 months. While that's a little above the 0.9 percent 12-month change seen in the November reading, it remains a relatively tame figure.

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