updated 7/18/2006 11:51:38 AM ET 2006-07-18T15:51:38

Wholesale prices rose by a larger-than-expected 0.5 percent in June but core inflation, excluding food and energy, edged up just 0.2 percent.

Major Market Indices

The Labor Department also reported Tuesday that wholesale food prices increased 1.4 percent last month, with prices for processed chickens jumping 12.1 percent and increases marked by eggs, fresh fruit and dairy products. Wholesale energy prices rose 0.7 percent.

For wholesale prices overall, analysts had been expecting an increase in June of 0.3 percent. Core inflation was in line with expectations.

The 0.5 percent increase followed rises of 0.2 percent in May and 0.9 percent in April.

Concern has permeated the markets that higher inflation will prompt further interest rate hikes by the Federal Reserve and contribute to a more severe economic slowdown.

“Overall, wholesale price inflation continues at a pace that makes the Federal Reserve uneasy, even as economic growth slows,” said Peter Morici, a professor at the University of Maryland’s business school. “If the Fed acts too vigorously to contain inflation, it risks a recession and stagflation.”

Economic unease deepened last week amid interest rate jitters and escalating violence in the Middle East that carried oil prices to new highs.

Analysts will be watching closely a key inflation signpost, consumer prices for June, which will be released on Wednesday, and Fed Chairman Ben Bernanke’s testimony before Congress that day.

On Monday, the Fed reported that output at the nation’s factories, mines and utilities jumped by a stronger-than-expected 0.8 percent last month following a gain of 0.1 percent in May. The report could stoke anxiety over inflation and prompt Fed policymakers to raise interest rates next month, experts said.

Economists generally believe that manufacturing will slow in coming months as overall economic growth slows.

The economy expanded at a brisk pace of 5.6 percent in the first three months of the year but many analysts believe that will slow to around 3 percent in the April-June quarter, as consumers struggle with rising interest rates, soaring gasoline prices and cooling home sales.

The increase in production in June put U.S. industry operating at 82.4 percent of capacity, a six-year high, up from a May operating rate of 81.8 percent of capacity.

The Fed keeps a close watch on the operating rate to see if it is approaching levels where bottlenecks could develop and threaten to boost inflationary pressures.

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