updated 2/18/2005 8:42:00 AM ET 2005-02-18T13:42:00

Wholesale prices rose 0.3 percent in January, driven up by big increases in the cost of new cars, cigarettes and alcohol, the government reported Friday.

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The Labor Department said the increase in its Producer Price Index, designed to track price pressures before they reach the consumer, reversed a 0.3 percent decline in December.

Widespread increases in a number of areas drove the core inflation rate, which excludes food and energy, up by 0.8 percent, the biggest increase in this area in more than six years.

The sharp increase in core inflation, if it were to continue, would certainly raise worries at the Federal Reserve that price pressures were beginning to heat up. The Fed has been raising interest rates at a gradual pace since last June in an effort to make sure that inflation does not get out of control.

Federal Reserve Chairman Alan Greenspan told Congress this week that the central bank was on guard against the possibility that a rebounding economy could trigger stronger inflation pressures.

However, he said that as of now Fed policy-makers were seeing no worrisome signs of a breakout in inflation.

If inflation pressures began to mount, the Fed would respond with faster interest rate increases than the gradual quarter-point moves it has been making, an action that would quickly translate into higher borrowing costs for consumers and businesses.

The big 0.8 percent jump in core inflation last month, the largest advance since a 1 percent surge in December 1998, was led by a 3.4 percent increase in the price of cigarettes. That was the biggest spike in tobacco prices since a 4.4 percent jump in April 2002.

The price of alcoholic beverages climbed 2.8 percent, the biggest one-month jump in nearly five years.

Prices for new passenger cars were up 1.2 percent, which was the biggest one-month increase since March 2003.

Energy costs, which last year served to push overall inflation higher, actually retreated again in January, dropping by 1 percent, following an even bigger 2.5 percent drop in energy prices in December.

The January drop reflected a 4.2 percent decline in gasoline and a 1.8 percent drop in natural gas prices which were offset somewhat by an 8 percent increase in home heating oil and a 1.2 percent rise in electricity prices.

Food costs were down 0.2 percent in January, the best showing since a similar 0.2 percent drop in food prices last August. The decline, which followed a 0.1 percent rise in December, reflected falling prices for vegetables, fresh fruits and eggs. Prices for coffee and beef rose last month.

The 0.3 percent decline in wholesale prices in December had originally been reported as a bigger drop of 0.7 percent. However, the overall figure and the component price measures were all readjusted to reflect the use of updated seasonal adjustment factors.

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