WASHINGTON, Jan 14: US producer prices jumped sharply in December but were well contained excluding food and energy costs, according to data released on Friday. The news is likely to reassure the Federal Reserve it does not need to raise interest rates much further.

Other government data showed US retail sales grew less than expected in December, but rose much more than initially reported in the prior month.

“We did see a big recovery in (producer) prices, but that was primarily in energy. Core prices increased only modestly and that’s good news for the Fed,” said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

“With the focus on the Federal Reserve, producers price index (PPI) is probably more important to the market,” he said.

The dollar dipped, while US bonds reacted positively to the inflation report, with the 10-year Treasury note US10YT=RR ending in New York 13/32 higher in price for a yield of 4.36 per cent. The Dow Jones Industrial Average (DJI) closed down 2.49 points at 10,959.87.

Investors are betting the Fed, which next meets on Jan. 31, will halt its 18-month, rate-hike campaign after one or two more quarter-percentage-point increases. The benchmark overnight federal funds rate target is now 4.25 per cent.

Soaring prices for energy and food pushed US producer prices up 0.9 per cent last month, more than twice expectations, but prices outside those volatile areas remained tame.

The rise in the PPI, a gauge of prices received by farms, factories and refineries, was the largest since September and out-stripped expectations on Wall Street, where economists had looked for a 0.4 per cent increase.

The Labour Department said the so-called core PPI, which excludes food and energy, edged up 0.1 per cent for the second straight month, suggesting that underlying inflation pressures remain muted. Markets expected core PPI to rise 0.2 per cent.

But economists at Morgan Stanley noted that if a sharp 3.4 per cent decline in auto prices was excluded, the core PPI measure showed a more robust increase of 0.3 per cent.

“We’re seeing some upside price pressure in other goods relative to the trend. Capital goods, for instance, are exhibiting pricing power,” said Morgan Stanley economist Ted Wieseman, noting capital equipment prices gained 1.3 per cent. Retail sales: Higher energy prices are also pinching consumers and December retail sales showed mixed results outside of a very strong automobile sector.

“Sales are mixed. Some categories are doing OK and others are weak. We’re not seeing an outright decline,” Thayer said.—Reuters