Page last updated at 15:19 GMT, Tuesday, 17 June 2008 16:19 UK

US producer prices up 1.4% in May

US car production line
Producers can only pass on limited price increases to customers

US producer prices jumped by more than expected in May, pushed higher by the soaring fuel and food prices that are hurting economies acround the world.

Prices climbed by 1.4% - the biggest gain since November 2007, according to US Labor Department statistics.

Further evidence of the strain on the US economy came from separate government numbers showing a 3.3% fall in new home construction during May.

The housing market has slowed over the past year, weighing on economic growth.

As a result, the US central bank, the Federal Reserve, now expects growth of between 0.3% and 1.2% this year, down from the 1.3% to 2% predicted in February.

Yet despite expectations of slower growth, fears remain over higher consumer prices, especially with oil prices setting new record highs of almost $140 a barrel.

You will see companies trying to [increase prices] in the coming months. If they are unsuccessful, they will probably have to eat the higher costs
Keith Hembre, chief economist, FAF Advisers.

Oil pressures

The increase in producer prices surprised many analysts, who had forecast a rise of about 1%.

But stripping out fuel and food, core producer prices rose by 0.2%, in line with analysts' forecasts.

This gave some analysts reason to be upbeat.

"PPI was as expected," said Jim Paulsen, chief investment officer at Wells Capital.

"Headline numbers are heavy, but that's just oil. Core numbers are staying fairly well controlled,"

"I think we have a little bit of inflation but certainly not runaway inflation. The inflation story would fade quickly if oil pulls back below $120," he said.

Others were less optimistic.

"We have very weak housing with no sign yet of a turnaround and meanwhile rising food and energy costs are boosting wholesale inflation," said Gary Thayer, economist, Wachovia Securities.

For this reason, many analysts consider that the Fed will keep interest rates at their current level of 2% when they meet next week.

Cost worries

The data showed that producer prices were now 7.2% higher than they were a year ago. This was the eighth consecutive month that prices had risen by more than 6% on an annual basis.

The new figures add to worries that producers will soon be forced to raise prices to limit the impact of spiralling fuel and food prices.

Analysts said that firms could only pass on so much to the consumer before having a negative impact on company profits.

"You will see companies trying to [increase prices] in the coming months. If they are unsuccessful, they will probably have to eat the higher costs," said Keith Hembre, chief economist at FAF Advisers.


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