03/15/2012 10:23 EDT | Updated 05/15/2012 05:12 EDT

US wholesale prices rose 0.4 per cent in February on costlier gas, core inflation tame

WASHINGTON - Higher gas costs drove U.S. wholesale prices up last month. But excluding the big jump in gas, inflation was mostly tame.

The Labor Department said Thursday that the producer price index rose 0.4 per cent in February. Food prices declined to offset some of the increase in energy costs.

The so-called "core" index, which excludes food and gas prices, increased 0.2 per cent, the smallest gain in three months. An increase in pharmaceutical prices accounted for roughly one-third of the gain.

In the past twelve months, wholesale prices have increased 3.3 per cent. That's the smallest year-over-year gain since August 2010.

The report "suggests that inflationary pressures are still contained," Paul Ashworth, an economist at Capital Economics, said in a note to clients. "More evidence that the U.S. economy could finally be on the right track."

Modest wholesale inflation reduces pressure on manufacturers and retailers to raise prices. That helps keep consumer prices stable. Low inflation also allows the Federal Reserve to keep short-term interest rates near zero.

Energy prices are a concern. They rose in February after falling in the two previous months. Wholesale gas costs jumped 4.3 per cent, the biggest rise in five months.

Oil and gas prices have surged since the beginning of the year. The average retail price for a gallon of gas was $3.81 on Wednesday, according to AAA. That's 50 cents higher than a month ago.

The Fed highlighted the increase in gas prices on Tuesday after its one-day policy meeting. Policymakers said they expect rising energy prices to temporarily raise inflation. But longer-term inflation should remain stable — repeating a view expressed by Chairman Ben Bernanke earlier this month.

The Fed also repeated its plan to keep its benchmark interest rate near zero until at least 2014, a sign that it is not concerned about out-of-control inflation.

Wholesale inflation peaked last year and has moderated steadily in recent months. Prices of many agricultural commodities, such as cotton and corn, spiked early last year but have since fallen.

Dairy goods dropped 2.8 per cent in February. Vegetables and meat prices also fell.

Pharmaceutical costs rose 0.6 per cent. Medical devices, soaps and detergents, and aircraft also posted big price increases.

A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.

Lower price growth also leaves more money in consumers' pockets, boosting their buying power and supporting economic growth. Some economists worry that rising gas prices could drag on growth.