NEW YORK (CNN/Money) - U.S. wholesale prices surged in January, the government said Thursday, exceeding Wall Street forecasts, driven in part by higher energy prices.
But economists were divided about whether the report meant higher consumer prices -- and interest rates -- were on the way. Some said the signs of inflation were becoming too obvious for the Fed to ignore, while others said businesses would not be able to fully pass on higher prices to consumers, keeping the Fed on hold for longer.
The Labor Department said its producer price index (PPI), a measure of wholesale prices, rose 0.6 percent after rising a revised 0.2 percent in December. The so-called core PPI, which excludes often volatile food and energy prices, rose 0.3 percent after falling 0.1 percent in December.
Economists, on average, expected PPI to rise 0.4 percent and core PPI to rise 0.1 percent, according to Briefing.com.
"Bearing in mind that the Fed wants higher inflation, the news is not unwelcome. And the market will remain firmly in the camp that the Fed will not tighten soon," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Nevertheless, the risks from the PPI are easy to see and look real in light of the big decline of the dollar and rise in import costs that preceded them."
Other economists were more sanguine and thought the Fed would be, too.
"I don't think this is going to draw much in the way of the Fed's attention," said Drew Matus, senior economist at Lehman Brothers. "It was delayed for some time, and nobody from the Fed was complaining. They don't focus on it."
The government had delayed the PPI release for about 30 days while it adjusted some of its industry classifications. The Bureau of Labor Statistics said those adjustments didn't affect the PPI's gain.
U.S. stock prices fell in early trading, despite a separate Labor Department report that weekly claims for unemployment benefits fell last week to their lowest level in three years. Bond prices also fell, pushing yields higher.
Despite steady economic growth since the end of 2001, when the latest recession ended, key measures of core consumer inflation have stayed low, enabling the Federal Reserve to keep interest rates low.
In fact, for a time, some policy makers worried about the possibility of deflation, a dangerous condition of falling prices that saps corporate profits and economic growth.
But recent gains in the consumer price index (CPI) and Thursday's PPI report, along with a general decline in the value of the dollar and recent gains in import prices, would seem to indicate that deflation risks have nearly disappeared.
"Along with the rise in non-fuel import prices, this suggests the weaker dollar is taking competitive pressure off of businesses, giving them the extra pricing power they didn't have a couple of years ago," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.
Reasons not to worry
Earlier this week, the Fed left its key overnight lending rate at the lowest level in more than 40 years and promised to be patient in raising rates. Some economists believe the Fed is being overly lax about inflation; one has even called for an immediate, dramatic interest-rate hike.
These economists worry that the Fed's easy-money policy risks letting dangerous price bubbles develop in stocks, bonds and real estate. They also say dramatic gains in commodity prices and a decline in the dollar are red-light indicators that higher consumer price inflation is on the way and say the Fed needs to move to pre-empt it.
Many economists, however, note that the dollar's decline has been mainly in Europe, while most U.S. imports come from nations in Asia, where many currencies remain undervalued.
Globalization and technological innovation have also combined to keep prices lower, sapping some of the ability of businesses to pass higher prices on to consumers and encouraging businesses to keep labor costs down. A weak labor market could sap consumer demand in the United States, keeping a lid on consumer prices.
"I'm not sure if this PPI number translates into inflation as most people know it. What it might translate into is higher prices for firms, who are going to have to find a way to make up for that higher cost," said Matus of Lehman Brothers. "One way to do that is to continue to extend productivity gains -- yet another sign of why firms are cautious in terms of hiring."
Energy, crude goods prices higher
In the January PPI report, energy prices jumped 4.7 percent, following a 1.6-percent gain in December. Gasoline prices rose 14.1 percent, following a revised 3.4-percent rise in December.
Economists typically ignore energy prices because they tend to be volatile and can obscure the trend in inflation.
But energy prices, driven by higher crude oil prices, have been high for some time and seem poised to stay high for months to come, meaning they could have a negative impact on consumer and business spending.
"It will hurt the middle class, people getting tax-refund checks; it will detract from the big tax-refund effect [on consumer spending] we were hoping for," Andy Busch, global foreign exchange strategist at Harris Nesbitt, told CNNfn.
Elsewhere in the PPI report, prices for crude goods such as timber and cotton rose 2.8 percent, following a revised 2.2-percent gain in December. Prices for intermediate goods such as lumber and yarn rose 0.4 percent after rising a revised 0.4 percent in December.
Food prices fell 1.4 percent after rising a revised 0.1 percent in December. The gain in core PPI was driven in part by a 0.6-percent jump in car prices and a 1.1-percent gain in light-truck prices.
In the deeper details, the PPI -- like Wednesday's CPI report -- painted a mixed picture of inflation, with some goods, including plywood and plastic resins, posting strong year-over-year gains and others, including computers and paperboard, posting big year-over-year declines.
"If you have one foot in a bucket of ice and another in a bucket of boiling water, on average you're perfectly comfortable," said Anirvan Banerji, director of research at the Economic Cycle Research Institute, a private research firm that publishes its own monthly inflation gauge. "In that sense, we're very comfortable with inflation right now."