US plays down `modest' rise in factory gate prices

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BY DIANE COYLE Economics Correspondent The rise in factory gate prices in the US last year was the highest for five years, according to official figures released yesterday. But administration officials said the increase was modest, and inflation was "nota problem".

The index of prices charged by producers rose 0.2 per cent in December and 1.7 per cent last year. Food prices jumped 1.6 per cent last month - dominated by a 69.3 per cent jump in vegetable prices - while energy prices fell 1.5 per cent.

The rise in the "core" index, excluding these volatile components, was 0.2 per cent, exactly in line with market expectations. Earlier falls in car prices were reversed in December.

Some analysts were concerned about bigger increases further back in the inflation pipeline. Intermediate goods rose only 0.5 per cent in price in the month but were 5 per cent up on a year earlier. Prices of crude goods - the inputs bought by manufacturers - rose 2.5 per cent in December, reaching a level 17 per cent higher than a year earlier.

James O'Sullivan, an economist at JP Morgan in New York, said: "This points to accelerating inflation. There has been a noticeable increase in the number of companies announcing price rises, and a lot of these are scheduled for January."

Others were less alarmed. Elias Bikhazi of Deutsche Bank Securities said: "Retailers and wholesalers are having a difficult time pushing through price increases. Inflation is well contained."

The dollar fell after the inflation figures were published, dipping below key rates against the yen and the mark, but mainly due to rumours that the Federal Reserve would backpedal on interest-rate rises in order to support the Mexican banking system. Robert Prior, international economist at James Capel, said: "The Mexican crisis has spilled over into the dollar."

Fed officials dismissed the rumours. The dollar recovered after Robert Rubin, the nominee Treasury Secretary, said at his confirmation hearings that a strong currency was in the country's interest. The assertion marked a change of direction after the neglect of the exchange rate by his predecessor, Lloyd Bentsen.

Confirmation that the US and Japan have reached a final agreement in their talks on opening Japan's financial services market helped the dollar.

The agreement was announced by Japan's finance minister. Details were due to be published yesterday evening.

Most economists still expect the Federal Reserve to raise interest rates after its policy meeting at the end of this month. Stuart Parkinson of Morgan Grenfell said: "What the US economy needs, the US economy will get from the Fed.

The mark strengthened against other European currencies yesterday. The Spanish and Swedish currencies came under pressure because of the two governments' budget crises.

Although some currency dealers talked of the peseta being forced out of the exchange rate mechanism, it closed well above its floor level of 91.912 to the mark.

Other exchange rates were hit by the rush to the safety of the mark. The pound closed down more than a pfennig at DM2.3954.