Higher energy prices rippled through the economy in June, helping to drive a bigger-than-expected gain in retail sales.
The sharp rise in wholesale prices — as well as "core" prices that exclude food and energy — could fan investors' fears about inflation. Economists viewed the energy cost hikes as temporary and not the beginning of a dangerous bout of spiraling prices, but said consumers likely will remain cautious as the unemployment rates ticks up.
The 1.8 percent jump in the Producer Price Index, which tracks the costs of goods before they reach store shelves, came after wholesale prices rose 0.2 percent in May, the Labor Department reported Tuesday. Last month's increase was double what economists expected.
"We don't expect to see these trends stick, especially with crude oil prices coming down," said Anika Khan, economist at Wells Fargo. "We don't see any inflation or deflation at this point."
Many analysts expect the increase in energy prices will be short-lived and that the weak economy will restrain companies from ratcheting up prices they charge consumers.
Retail sales rose 0.6 percent last month, due mainly to higher gas prices and auto sales, the Commerce Department said Tuesday.
Still, the second straight increase in retail sales may be a sign that the economy is on the verge of a rebound. Americans spending more for the rest of this year should help end the longest recession since World War II, but economists maintain that any recovery will be slow.
Over the past 12 months, wholesale prices have actually fallen 4.6 percent.
Stripping out volatile food and energy prices, all other prices rose a bigger-than-expected 0.5 percent in June, the most since October. In May, the core prices dipped 0.1 percent. Economists expect a bump-up in core prices of just 0.1 percent last month.
For the 12 months ending in June, core prices rose 3.3 percent.
In June, energy prices jumped 6.6 percent. Gasoline prices increased 18.5 percent, home-heating oil 15.4 percent and liquefied petroleum gas, such as propane, went up 14.6 percent. All were the biggest increases since November 2007.
Crude oil prices topped $72 a barrel in June but have eased since then. Oil prices hit a record-high of $147 a barrel last July.
Food prices also rose sharply in June. They posted a 1.1 percent gain, after falling 1.6 percent in May.
A 21.8 percent jump in the price of vegetables led the way. Prices for eggs and young chickens also fed the increase in overall food prices as did a record 3.6 percent increase in the price of bottled carbonated soft drinks. The prior record price increase of 2.7 percent in that category came in January 1998.
Higher prices for cars, trucks, furniture and pharmaceutical preparations factored into the pickup in "core prices" in June. Economists blamed higher energy costs for spilling over and helping to push up the prices of other goods. They believe this will reverse as energy prices moderate.
On Wall Street, stocks dipped despite strong earnings reports from Johnson & Johnson and Goldman Sachs Group Inc. The Dow Jones industrial average lost about 15 points in late-morning trading, while broader indices also edged down.
Meanwhile, businesses cut inventories for the ninth consecutive month in May, as companies continued to trim stockpiles amid the recession.
The Commerce Department said inventories fell 1 percent in May, a bit worse than the 0.8 percent drop economists expected. Total business sales dipped 0.1 percent in May, led by a 0.9 percent drop in sales by manufacturers.
To battle the recession, the Federal Reserve has slashed a key banking lending rate to a record low near zero. It is expected to hold the rate there through the rest of this year to help support the economy and because the central bank doesn't foresee inflation getting out of hand.
Fed Chairman Ben Bernanke and many private economists predict the recession will end later this year. However, they warn that the recovery will be slow. That means the unemployment rate, now at a 26-year high of 9.5 percent, will keep rising, probably hitting double-digits in the months ahead.
At the Fed's last meeting in late June, policymakers dropped concerns that the recession could trigger deflation — a destabilizing and prolonged bout of falling prices and wages.
Fed policymakers did acknowledge that energy and other commodity prices had risen. But they predicted that idle factories and the weak employment market would make it hard for companies to raise prices. The Fed said it expects inflation will "remain subdued for some time."
This program aired on July 14, 2009. The audio for this program is not available.