Wholesale prices shoot higher

NEW YORK (CNNMoney.com) -- Wholesale prices shot higher in February, according to a government report Thursday that showed much greater inflation pressures than had been forecast.

The Producer Price Index rose 1.3 percent after a 0.6 percent decline in January. Economists surveyed by Briefing.com had forecast a 0.5 percent rise in the overall measure of prices paid by businesses. Energy prices were the big culprit, rising 3.5 percent, but food prices also jumped 1.9 percent, the largest month-over-month rise in that key product in more than a year.

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The more closely watched core PPI, which strips out volatile food and energy prices, rose 0.4 percent, compared to the 0.2 percent rise in January. Economists had forecast that core PPI would again be up 0.2 percent.

Stocks opened slightly lower following the report, then turned narrowly higher, while bond prices were also little changed.

Wachovia economist Sam Bullard said that the PPI report is volatile enough that the market might not be overly spooked by the worse than expected reading, although both energy and food prices were much higher than forecasts.

"The year-on-year numbers are still relatively tame, well off of their cycle highs," said Bullard. The overall PPI was up 2.5 percent from a year earlier, while core PPI posted a 1.8 percent rise compared to a year earlier.

The PPI reading comes the day before the Consumer Price Index report, the government's key measure of inflation at the retail level. Economists are forecasting the overall CPI will rise 0.3 percent after a 0.2 percent gain in January, while the core CPI is expected to rise only 0.2 percent after a 0.3 percent jump the previous month.

"I don't think there's a great correlation between PPI and CPI," said Bullard. "But I would definitely say this report means the risks for CPI are to the upside."

The PPI report also comes just less than a week before the Federal Reserve is set to meet March 21 to weigh inflationary pressures as it decides where to set interest rates. Wachovia and most other economists are forecasting the Fed will leave rates unchanged, and Bullard said even with the higher than expected reading he doesn't expect a move.

Bullard said there were some unusual items that seemed to be responsible for much of the higher than expected reading in core PPI, including a 4.1 percent rise in tobacco products and a 1.7 percent rise in the price of light trucks, even as car prices fell.