US inflation leap induces fear of aggressive rate rise

A sharp rise in the core rate of US producer price inflation caused bond yields to jump sharply yesterday as investors worried about the potential for stronger interest rate rises to curb rising inflation.

The main producer price index rose 0.3 per cent in January, but the core rate - stripping out volatile food and energy costs - jumped 0.8 per cent, its biggest monthly rise since December 1998.

The data from the labour department outstripped Wall Street expectations of 0.2 per cent rises for both measures, although some economists had upgraded their forecasts, following revised numbers earlier this week.

Mr Stephen Stanley, economist at RBS Greenwich Capital, described the core rate as "downright ugly".

"At a minimum, this will have Fed officials sweating a little more about the outlook for prices," he added.

Year on year, core inflation was up 2.7 per cent in January, up from a rate of 2.2 per cent in December and 1.9 per cent in November.

The January reading marked the strongest annual gain since November 1995.

Low inflation has allowed the Federal Reserve to raise interest rates in a series of measured quarter-point moves to 2.5 per cent.

If the rise in producer prices were to push up consumer inflation in the coming months, the central bank might have to raise rates more aggressively to curb the price rises.

Yields on interest-rate sensitive two-year Treasuries rose sharply, up 9 basis points to 3.46 per cent, a two-year high.

Benchmark 10-year bond yields rose 7.1 basis points to 4.25 per cent.

Mr Brian Robinson, bond strategist at 4Cast consultancy, said the sharp rise "shocked" the market.

"The wholesale price increase is broad and tough to explain," he added.

Earlier this week appearing before Congress, Mr Alan Greenspan, Federal Reserve chairman, signalled that the steady pace of monetary tightening was likely to continue.

Tobacco products were one of the strongest sectors, up 3.1 per cent as a result of tax rises.

Passenger car costs rose 1.2 per cent. Meanwhile, capital equipment and pharmaceutical products both rose 0.6 per cent.

Analysts warned that much of the monthly rise could be attributed to one-off factors and could have eased this month.