updated 12/15/2009 5:26:18 PM ET 2009-12-15T22:26:18

The economy flashed a warning sign of inflation Tuesday, but the recovery is so fragile that experts say a doomsday scenario of runaway prices and higher interest rates is a long way off, if it happens at all.

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While the Federal Reserve is all but certain to take up the prospect of inflation at its meeting this week, no one expects policymakers to raise interest rates anytime soon to fight the threat. Rates are at record lows to nudge the recovery along.

Even if the Fed did decide to raise rates later, there would be risks: Borrowing money would be more expensive, squeezing corporate profits, and stock prices could fall — all of it threatening to derail the recovery.

Fed Chairman Ben Bernanke has repeated his belief that slack in the economy — meaning idle plants and the weak job market — will hold back price increases.

Those factors should "contribute to the maintenance of low inflation in the period ahead," Bernanke wrote in a letter released Tuesday in response to questions from Sen. Jim Bunning, R-Ky. "The bulk of evidence indicates that resource slack is now substantial."

Images: Graphs of industrial production

The economy is growing steadily but slowly. The latest sign was a report that industrial production rose a better-than-expected 0.8 percent in November. Factories, mines and utilities are also using more of their plants as the recovery takes root.

Still, they're not using nearly as much of their production capacity as they do in normal economic times. The abundance of spare capacity and such soft demand are two more reasons inflation will probably remain tame.

Overall wholesale prices jumped 1.8 percent in November, the Labor Department said. That was more than double the gain analysts had expected. Core inflation, which excludes energy and food, rose 0.5 percent, the sharpest increase in more than a year.

That's still not as scary as it may seem as an indicator of inflation. Much of the increase reflects a jump in energy prices, which will probably reverse itself. Oil prices are already down about 10 percent this month.

Even without considering energy, the higher prices were driven by light trucks becoming more expensive, which may be a temporary factor reflecting a shift to new 2010 models.

"Inflation for the next year or two really will not be a problem in the United States," said Nariman Behravesh, chief economist at IHS Global Insight.

Behravesh predicted the Fed would not begin raising interest rates until next fall.

"The recovery is still going to be pretty lackluster and somewhat fragile," he said. "The Fed is not going to do anything to upset the apple cart at a time when inflationary pressures remain very muted."

One reason is that throughout the economy, shoppers are so budget-conscious that retailers have no choice but to keep prices down.

The Kroger grocery chain, for example, posted a lower quarterly profit in part because it's had to cut prices to compete — even as its own costs have risen. And electronics chain Best Buy predicted Tuesday its profits will be squeezed as shoppers veer toward cheaper laptops and TVs.

Image: Graph of Producer Price Index

Higher prices at the gas pump have also proved unsustainable. Valero Energy Corp., the nation's largest oil refiner, shuttered a major refinery over the summer and plans to close another.

The price of crude oil has risen this year, but refiners haven't been able to pass the costs along because millions of people have lost jobs and no longer commute. That's helped drive down demand for gasoline.

Retail gas prices peaked at $2.69 in late October and have been falling steadily ever since, as they typically do after the peak summer driving season.

Last month's increase in industrial production was led by stronger activity at mines, up 2.1 percent. The manufacturing sector — the biggest chunk of industrial output — rose 1.1 percent. Utilities fell 1.8 percent, according to the Fed report.

But any gains beyond that will probably be slight. People without jobs or fearful of losing them are unlikely to start spending freely again. Though unemployment dipped in November to 10 percent, analysts expect it to resume rising, a further drag on the economy.

Wholesale energy prices posted their biggest surge since August. The price increases for gasoline and home heating oil were especially sharp.

Still, oil prices have fallen in recent days — to around $70 a barrel, down from a 2009 high of $82 per barrel hit in October.

Paul Dales, U.S. economist at Capital Economics, called the increase in wholesale prices "a red herring."

"The Fed is not going to see this as any indication that their actions are triggering higher inflation," he said.

The Producer Price Index reflects price pressures before they reach the consumer. The government will release its look at consumer prices on Wednesday. Economists predict a more moderate gain of 0.4 percent, with core consumer prices expected to rise 0.1 percent.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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