Producer prices tame but gain in core vexes

By Alister Bull

WASHINGTON (Reuters) - Producer prices excluding energy and food rose at the fastest pace since 1991 in the year through April, highlighting inflation concerns that could limit the Federal Reserve's options in shoring up a weak economy.

The U.S. central bank has been counting on slower growth to prevent soaring energy and food prices from spilling into wider inflation, but the data on Tuesday on prices paid at the farm and factory gate suggested that battle has yet to be won.

The Labor Department said the producer price index rose 0.2 percent last month as food prices took a respite from their march upward and as gasoline costs, which usually climb sharply in April, fell after adjustment for seasonal swings.

However, core producer prices, which strip out volatile energy and food costs, increased by 0.4 percent -- twice the rate forecast on Wall Street.

Over the past 12 months, core prices rose 3 percent, the largest gain since December 1991. Overall producer prices were up an even-stiffer 6.5 percent.

U.S. stock prices fell as investors, already alarmed by a fresh record oil price notched on Tuesday above $129 per barrel, took further fright over the high core price gauge.

"Nothing here bodes well for consumers," said Joel Naroff, president at Naroff Economic Advisors in Holland, Pennsylvania.

"It's putting more pressure on businesses to raise their costs. This is problematic in an economic slowdown we are in right now. This will have a more negative news for earnings and inflation," he said.  Continued...