Key inflation measure holds steady

NEW YORK (CNNMoney.com) -- Wholesale prices rose in April but excluding food and energy they stayed in check for the second straight month, the government said Friday in a report showing a key inflation reading below Wall Street forecasts.

The Producer Price Index, which measures the price of goods at the wholesale level, rose 0.7 percent last month, down from a 1.0 percent gain in March, the Labor Department reported. Economists surveyed by Briefing.com had forecast a 0.6 percent rise.

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But the more closely watched core PPI, which strips out volatile food and energy prices, showed no rise after also coming in unchanged in March. Economists had forecast a 0.2 percent increase.

The report showed that energy prices jumped 3.4 percent in the month, while food prices rose 0.4 percent. Both were down from the increases posted in both February and March.

The overall PPI is now up 3.4 percent over the last 12 months, while the core PPI is up only 1.6 percent over the same period. The Federal Reserve is generally believed to want to see core inflation readings in the range of a 1 to 2 percent increase on an annual basis.

Wednesday the Fed left interest rates unchanged, although its statement said core inflation remains elevated and that its major concern was "the risk that inflation will fail to moderate as expected."

Mark Vitner, a senior economist with Wachovia, said the PPI report has some readings that justify the Fed's concern. The overall and core PPI is for finished goods such as bread but prices for crude goods such as wheat and intermediate goods like flour are also measured. Prices for intermediate goods jumped 0.9 percent, while prices for crude goods excluding food and energy climbed 0.4 percent, pointing to inflation pressures in the pipeline.

"The Fed is not going to say 'We have to cut rates because consumer spending was weak in April,'" Vitner said. "They're right that inflation is still higher than they'd like. The best way the Fed can keep higher energy prices from spilling over is to hold the line on rate cuts."

The inflation reading comes ahead of Tuesday's report on the Consumer Price Index, the government's main inflation gauge. Economists are forecasting that CPI rose 0.5 percent, down from the 0.6 percent increase in March, while core CPI is expected to edge up 0.2 percent after a 0.1 percent increase in March.