updated 5/13/2004 8:55:00 AM ET 2004-05-13T12:55:00

Wholesale prices shot up by 0.7 percent in April, the largest increase in a year, propelled by higher gasoline costs and the biggest jump in dairy product prices since 1946.

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The increase in the Producer Price Index came after wholesale prices rose by 0.5 percent in March, the Labor Department reported Thursday. The latest PPI report, which measures prices before they reach store shelves, provided fresh evidence that inflation is awakening after a long slumber.

April’s increase was the largest since a 1.3 percent spike in March 2003 and exceeded the modest 0.3 percent advance that economists were forecasting. Sharply higher prices for energy and food were the culprits of the large increase in the PPI last month.

Excluding energy and food prices, the “core” rate of inflation rose in April by a more subdued 0.2 percent for the second straight month, matching analysts’ expectations.

Separately, the Commerce Department reported that sales at the nation’s retailers dropped by 0.5 percent in April, following a strong 2 percent rise in March. Economists were forecasting a small 0.1 percent rise in sales for last month. April’s performance was bogged down by sharp drop in automobile sales.

In other economic news, new applications for unemployment benefits rose last week by a seasonally adjusted 13,000 to 331,000, the Labor Department said. The increase, while larger than some analysts’ expected, still left claims at a level suggesting the job market is improving.

The more stable four-week moving average of claims, which smooths out weekly fluctuations, fell last week to 335,750, the lowest level since Nov. 25, 2000.

On the inflation front, an improving economic climate is giving some companies more power to raise prices — something many were hard-pressed to do when the economy was previously stuck in a long slump.

While economic reports show inflation moving higher, Federal Reserve Chairman Alan Greenspan and his colleagues at their meeting last week indicated that they are not yet worried, saying “long-term inflation expectations appear to have remained well contained.”

The Fed decided last week to hold short-term interest rates at a 46-year low of 1 percent, where it has been since last June. But it signaled that rates could be moving higher now that the economic recovery is on solid ground. Some economists believe the Fed will begin to nudge up rates as soon as the June or the August meetings to keep inflation in check.

Although analysts don’t believe inflation is a threat to the recovery at this point, its upward movement marks a change in the pricing climate from a year ago. Then the Fed was worried about the prospects of deflation, a prolonged and widespread price decline.

In Thursday’s PPI report, energy prices jumped by 1.6 percent in April, up from a 0.6 percent rise in March. Gasoline prices went up by 3.4 percent last month, the largest rise since January. Residential natural gas prices rose by 2.5 percent and residential electric power costs increased by 0.4 percent. Home heating oil, however, fell by 1.3 percent.

Crude oil prices recently hit new 13-year highs, reflecting strong global demand and tensions in the Middle East.

Food prices, meanwhile, rose by 1.4 percent in April, on top of a 1.5 percent increase in March. The Labor Department said that more than half of the increase in April was due to a 10.4 percent jump in prices for dairy products. That was the biggest increase in dairy product prices since July 1946.

Prices for beef and veal, soft drinks and pork also were higher, while costs for eggs and vegetables fell sharply in April.

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