Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Rising wholesale prices ring inflation alarm bells

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- The cost of producing goods is rising, and consumers could soon pay the price.

The Producer Price Index rose 1.6% in February alone, the Labor Department reported Wednesday, the biggest jump in nearly two years. The rise was far worse than the 0.6% increase that economists surveyed by Briefing.com were expecting. Overall, prices rose 5.6% from a year ago.

The biggest drivers were a 3.9% jump in wholesale food prices and 3.3% rise in energy prices. But core inflation, which strips out volatile food and energy prices, was up only 1.8% compared to a year ago following a 0.2% rise in the month -- in line with forecasts.

The sharp rise in oil prices is a major concern for economists. In a recent survey by CNNMoney, economists identified the oil spike as the biggest headwind facing the nation's economic recovery.

And some fear that unlike previous scares, higher prices could hit consumers.

"The big difference today relative to the 2008 commodity rise is that underlying demand is significantly more robust. This means that price gains are more likely to stick," said a note from Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

But the Federal Reserve seems less concerned with inflation. The Fed regards core inflation as a better gauge for rising prices.

After its regular meeting Tuesday, the Fed said recent increases in commodity prices were "transitory" and that underlying inflation had been subdued.

Will the costs be passed on to consumers?

A number of companies have already announced a range of price increases to respond to higher commodity prices, including Kellogg (K, Fortune 500), Whirlpool (WHR, Fortune 500) and clothing maker Hanes Brands (HBI).

The closely watched Consumer Price Index, the government's key inflation reading which measures what the average American pays for goods and services, is due out Thursday.

Despite rising gasoline prices over the last month, economists surveyed by CNNMoney are forecasting only a 2% rise in overall consumer prices over the last 12 months, and a 1.1% rise in core-CPI.

Even if the inflation pressures don't bleed through to the retail level, higher wholesale prices could still be bad news for the economy. If businesses don't think they can raise their prices to respond to higher wholesale costs, that could squeeze profits, leading to a drop in stock prices and weaker hiring going forward.

Several companies, including Procter & Gamble (PG, Fortune 500), Colgate-Palmolive (CL, Fortune 500) and Hershey's (HSY, Fortune 500) have warned of tighter profit margins due to rising commodity costs.

At least one company, supermarket chain Wegmans Food Markets, has vowed to freeze prices on the store's own brand of basic necessities. To top of page

Index Last Change % Change
Dow 17,598.20 -91.66 -0.52%
Nasdaq 5,115.38 -12.90 -0.25%
S&P 500 2,098.04 -5.80 -0.28%
Treasuries 2.15 -0.06 -2.49%
Data as of 10:05pm ET
Company Price Change % Change
Apple Inc 118.44 -2.86 -2.36%
Bank of America Corp... 17.77 -0.11 -0.62%
Frontier Communicati... 5.15 0.43 9.11%
Micron Technology In... 19.00 0.49 2.65%
General Electric Co 25.87 -0.23 -0.88%
Data as of 4:01pm ET
Sponsors

Sections

Five major retailers have agreed to stop selling realistic-looking toy guns in New York state, attorney general Eric Schneiderman said Monday. More

Represented by Teamsters, workers servicing some big Silicon Valley firms demand higher wager and better benefits. More

Candle-Lite is committed to manufacturing in America -- which is a good thing because it contributes more than $300 million to Ohio's economy. More

You can't blame it on the economy anymore. More Millennials now have jobs, but are still living at home. More