By Martin Crutsinger
Associated Press
Wednesday, April 16, 2008

Inflation at the wholesale level soared in March as energy kept getting more expensive and food costs rose much more than expected.

The Labor Department reported yesterday that its producer price index rose 1.1 percent last month, the largest increase since a 2.6 percent rise in November. That was the biggest one-month increase in 33 years.

Analysts, on average, had expected a 0.4 percent rise in wholesale prices in March. However, food costs, which fell 0.5 percent in February, rose 1.2 percent last month, propelled by big gains in vegetables and beef and the biggest increase in rice prices in more than five years. Those were far larger increases than expected.

Core prices, which exclude energy and food, rose 0.2 percent, down from a 0.5 percent rise in February.

But with crude oil rising $2.03 a barrel yesterday, to $113.79, analysts said consumers should be braced for more inflation.

"Wholesale prices are rising, and the consumer should expect more shocks at the supermarket and the gas station," said Joel L. Naroff, president of Naroff Economic Advisors.

For the past 12 months, producer prices for finished goods are up 6.9 percent, the biggest year-over-year increase in nearly two years.

With the economy slowing and inflation rising, some analysts are concerned about the possibility of stagflation, in which economic growth stagnates but prices keep rising.

Such a development would put the Federal Reserve in a bind. The central bank has been cutting interest rates to combat the current slowdown, but if inflation pressures keep rising, it might be forced to stop cutting interest rates for fear that it would make inflation worse.

For March, energy prices rose 2.9 percent. The price of gasoline was up 1.3 percent, while natural gas rose by 4.2 percent. However, the price of new cars fell 0.2 percent, indicating the struggles automakers face as demand falls.

The government will report on consumer prices today.