Inflation Pressures Growing At the Wholesale Level

US inflation at the wholesale level rose slower than expected in April, but core inflation, which strips out volatile food and energy prices, rose twice as fast as expected and hit its fastest annual pace in more than 16 years, the Labor Department said.

The department's Producer Price Index, which measures inflation pressures before they reach the consumer, rose 0.2 pct in April following a 1.1 increase in March. That's slower than the 0.4 pct rise expected by economists polled by Thomson's IFR Markets.

However core inflation rose 0.4 pct for the month, twice as fast as the March increase.

That left core inflation up 3.0 pct in the past twelve months, the largest change since December 1991. Economists were expecting core inflation to rise only 0.2 pct.

"The PPI core was high, both in absolute terms and relative to expectations," said Pierre Ellis, senior economist at Decision Economics in New York.

Soaring energy costs have buoyed producer prices and spilled into broader measures of inflation in a worrying fashion for the Federal Reserve, even as it has slashed interest rates to buffer growth from the housing crisis.

"Nothing here bodes well for consumers. We are not going to see easing any time soon," said Joel NarofF, president at Naroff Economic Advisors in Holland, Pa.

"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.

The slower than expected overall inflation was due to falling energy prices and flat food prices, categories that boosted inflation in the previous month.

Energy fell 0.2 pct, the largest drop since December, while food was unchanged in the month. Within the energy sector, gasoline fell 4.6 pct, the largest drop since December.

Home heating oil rose 5.4 pct and liquefied petroleum gas rose 3.5 pct. Residential electric power rose 1.2 pct, the largest increase since January 2006.

Although overall food prices were unchanged, the cost of milled rice rose 17.4 pct, the largest increase since November 1993. However that increase was offset by a 12.3 pct price decline in fresh eggs, the largest decline since June.

The price of vegetables, beef and veal also fell in the month.

Overall inflation is now up an unadjusted 6.5 pct over the last year.

Other data on Tuesday showed the retail environment continued to struggle with record high gasoline prices and fewer shopping trips by consumers as they consolidate their travel, which resulted in the third consecutive weekly retail sales decline.

For the week ending May 17, weekly chain store sales decreased by 0.4 percent, according to the International Council of Shopping Centers (ICSC). On a year-over-year basis, sales rose by 1.6 percent.

A separate report from the Chicago Federal Reserve Bank showed economic activity was weaker in April across a range of sectors. The Chicago Fed's National Activity Index, compiled from an array of economic data, moved down to -1.17 from -0.98 in March.

A three-month moving average of the index tumbled to its lowest level since November 2001, when the United States emerged from its last recession, and showed the economy could be contracting for a fifth straight month.

A negative reading on the index indicates below-trend growth, with readings below -0.70 indicating a heightened risk of recession.

--Reuters and Thomson Financial contributed to this report.

© 2009 CNBC