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Wholesale Prices Surge but Analysts Say Inflation Remains Moderate

Inflation at the wholesale level jumped 2% in November, the biggest increase in three decades. But many economists said the gain didn't signal a major worsening of inflation.

The rebound in the producer price index, which measures inflationary pressures before they reach the consumer, was more than four-times bigger than the average estimate, which called for a gain of only 0.7%. However, many economists said the number reflected volatile components in the data and not overall inflation.

The core PPI, which excludes the volatile food and energy sector, rose 1.3%, also well above the 0.2% expected. This was the largest increase since July 1980, the Labor Department said.

Tremendous Volatility

"We've had tremendous volatility in core PPI prices, which is just the result of some seasonal adjustment issues due to autos," said Conrad DeQuadros, a senior economist at Bear Stearns, in an interview on CNBC's "Power Lunch." He said once the autos and light trucks are stripped out, the core PPI was 0.2%, which was the level analysts were expecting.

Others expect the latest month's data simply reversed some of the steep declines reported the prior month.

"Although inflation is not dead, the numbers today represent, on a year-over-year basis, fairly mild rates of producer price pressures," said Jason Schenker, an economist at Wachovia, in a research note. "If we were to average the volatile monthly data over the past two months we would see that both the headline and the core prices rose by about 0.2% month-over-month, which is fairly close to the trend."

The bigger-than-expected increases followed last week's surprisingly tame news on consumer prices, which were unchanged in November.

Investors are closely watching inflation for signs of what the Federal Reserve will do. Fed policymakers have consistently said they are watching inflation, which they see as a risk to economic health.

Higher Rates Possible

After the PPI numbers came out, Dallas Federal Reserve Bank President Richard Fisher said that inflation has stabilized but is still too high, so further increases in interest rates may be needed.

"I would have to say that the risk of unacceptably high inflation still outweighs the risk of substandard economic growth," Fisher said in a speech.

"On the inflation front, the good news is inflationary pressures appear to have reached a stasis, despite the labor shortages in certain sectors," he said. "The bad news is that the stasis is at too high a level for party poopers like me who will have no choice but to advocate tightening monetary policy further if inflation does not ratchet downward."

Still, many analysts say the latest data isn't likely to change the Fed's overall view.

"I certainly think the recent data will not have changed the Fed’s mind," said Dean Maki, chief U.S. economist at Barclays. "The core inflation rate has been running above the Fed’s comfort zone for two years now, and that’s their main concern at present."

On a year-over-year basis, headline inflation is up 0.9% and core producer inflation is up 1.8%.

Digging into the numbers, core intermediate goods fell 0.3% in November, after no change in October. Core intermediate goods, which are partially processed goods, are a leading component of the PPI in relation to inflation at the consumer level.

Energy Costs a Factor

One big difference between the consumer and wholesale price indexes was energy costs, which fell in the consumer survey, but were up 6.1% in the November survey of wholesale prices.

The increase in wholesale energy costs was led by a 17.9% jump in gasoline prices, the biggest increase since June 2000.

In other economic news, construction of new houses and apartments rose 6.7% in November to a seasonally adjusted annual rate of 1.588 million units. This number, which was higher than expected, followed a 14% decline in October.

Applications for new build permits fell for a 10th consecutive month to a new nine-year low. Building permits, which are seen as a leading indicator of housing trends, fell 3% to a seasonally adjusted rate of 1.506 million, slightly below estimates.

Earlier, in an interview on CNBC's "Squawk Box," Hovnanian Enterprises Chief Executive Ara Hovnanian said he doesn't expect the housing market has hit bottom yet.

"There is reason for optimism that we'll see the bottom in the beginning of '07," the homebuilder said. Hovnanian expects cancellations of new house orders to continue to "tweak up" a little bit and then begin to level off into the second quarter.