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Core wholesale inflation up most in 6 months

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WASHINGTON (AP) — Companies paid higher prices for tobacco, pickup

trucks and pharmaceuticals in July, driving underlying wholesale

inflation up by the most in six months.

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This measure of inflation, which excludes volatile food and energy

prices, is known as the core Producer Price Index. It rose 0.4

percent in July, the biggest increase since January.

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The overall PPI, which measures price changes in goods before they

reach the consumer, rose 0.2 percent last month, the Labor

Department said Wednesday. That follows a 0.4 percent drop in June,

the first decline in 17 months.

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Gas prices fell for the second straight month. Food costs rose 0.6

percent, the biggest rise since February.

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The jump in the core index is unlikely to continue, economists

said. One reason is that raw material prices are increasing at a

slower pace than the finished goods tracked by the PPI.

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Also, the higher core reading was driven largely by costlier

tobacco products and pricier pickup trucks, which are probably

one-time events.

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Tobacco prices, which are affected by seasonal factors, jumped 2.8

percent. That was the largest increase in more than two years.

Truck prices rose 1 percent, but that largely reflects supply

disruptions stemming from the Japan earthquake. The impact of those

disruptions are started to fade, based on other data.

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“Overall, these data do little to alter our belief that most of the

recent surge in core consumer price inflation is temporary and that

it will fall back next year,” said Paul Dales, senior U.S.

economist with Capital Economics.

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The PPI has increased 7.2 percent in the past 12 months. That’s up

sharply from earlier this year but below May’s rise of 7.3 percent,

which was the biggest in two and a half years. The core index has

increased 2.5 percent in the past 12 months, the most since June

2009.

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Higher wholesale prices raise pressure on retailers, grocery stores

and restaurants to pass along the costs to consumers. But that will

be difficult, because high unemployment and stagnant wages are

causing consumers to hold back on spending.

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“Modest inflationary pressures are building, although they are

likely to recede … over the balance of the year as last year’s

energy price surges” taper off, Steven Wood, an economist at

Insight Economics, said in a note to clients.

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Consumers are seeing some relief from high gas prices, which are

expected to keep falling.

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Earlier this year, food and gas prices spiked and caused the

Producer Price Index to jump 1.5 percent in February, after a 1

percent gain the previous month.

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Federal Reserve Chairman Ben Bernanke faced criticism that the

central bank’s policies were contributing to higher inflation. The

Fed has kept the short-term interest rate it controls at nearly

zero since December 2008.

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But gas prices fell from a peak in early May of nearly $4 a gallon

to a nationwide average of $3.59 a gallon on Tuesday. One reason

for the decline: Americans are driving less. Drivers have cut back

on their gasoline purchases for 21 straight weeks, according to a

weekly survey by MasterCard SpendingPulse.

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And oil prices, which spiked this spring because of turmoil in the

Middle East, dropped to $86.65 a barrel on Tuesday. Concerns about

slower global economic growth have pushed oil prices down from

about $97 a barrel a month ago.

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Bernanke and many private economists have said the price increases

would be temporary and inflation would remain muted. High

unemployment makes it difficult for workers to press for higher

wages, which in turn makes it hard for companies to raise prices on

the products they sell.

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Lower inflation gives the Federal Reserve more leeway to keep

interest rates low and potentially engage in other efforts to boost

the economy.

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Last week, Fed policymakers said they will keep its benchmark

short-term rate at nearly zero at least until mid-2013. Previously,

the central bank had never given a clear time frame. It hopes the

certainty of low rates will encourage consumers and businesses to

borrow and spend more.

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“Inflation has moderated as prices of energy and some commodities

have declined from their earlier peaks,” Fed policymakers said Aug.

9. The central bank forecast in June that inflation will remain

within its informal target range of below 2 percent this year and

next.

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