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 16,643.01 -11.76 -0.07%
Nasdaq 4,828.33 15.62 0.32%
S&P 500 1,988.87 1.21 0.06%
Treasuries 2.19 0.02 0.83%
Data as of 3:53am ET
Company Price Change % Change
Freeport-McMoRan Inc... 10.50 0.31 3.04%
Bank of America Corp... 16.36 -0.08 -0.49%
Apple Inc 113.29 0.37 0.33%
Intel Corp 28.42 0.70 2.53%
Alcoa Inc 9.41 0.55 6.21%
Data as of Aug 28
Sponsors

Sections

Efforts to unionize low-wage employees of fast-food franchisees and outside contractors get lift from decision of NLRB. More

The U.S. economy has performed well this year. But there's lots of global gloom. Which will influence the Fed the most? More

The market volatility in China and the U.S. could hit private companies, especially late-stage unicorns. More

How do you run a successful crowdfunding campaign? Indiegogo's CEO Slava Rubin offers his top tips and mistakes to avoid. More

Looking for something good on Netflix? These entertaining films will help you learn more about finance and investing. More