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U.S. producer prices posted their biggest monthly jump in almost 10 years in February, reflecting a surge in crude oil prices, the government reported Thursday. However, the core rate, which excludes volatile food and energy costs, advanced at a more moderate pace.
    The Producer Price Index jumped 1 percent last month, the Labor Department said, exceeding the 0.6 percent increase expected and above January's flat reading. It was the biggest jump in the main index since October 1990. The core rate, which excludes food and energy costs, rose 0.3 percent, in line with expectations and reversing January's 0.2 percent drop.

Stripping out huge advances in energy and tobacco prices, inflation posted only a moderate advance last month -- suggesting to financial markets that the Federal Reserve's inflation-fighting interest rate increases may not come as fast and furious as many had been anticipating.
    "Oil prices are important for the economy, but there continues to be no evidence that these increases are being monetized and passed on into the general structure of prices," said John Ryding, senior economist with Bear Stearns Inc. "We continue to expect that the Fed will boost rates by only 25 basis points at next week's (Federal Open Market Committee) meeting."

The Dow Jones industrial average -- comprised of 30 companies that are generally more sensitive to rising interest rates -- took off at the opening bell as investors concluded that earnings will not be as significantly impacted by higher borrowing costs. Bonds also gained ground as investors gained reassurance that wholesale inflation remains subdued -- at least for the time being.Tame costs on the production line typically mean stable consumer prices, because producers do not have the rising costs that are typically passed on to buyers.
    Fed officials meet next Tuesday in Washington to discuss monetary policy and the direction of short-term lending rates. Most Wall Street analysts expect the Fed will wrench up its benchmark rate for overnight loans between banks by another quarter point. That would be the fifth quarter-point increase since June. The rate now stands at 5.75 percent.
    After today's numbers, some analysts expect the Fed may not have to press so hard on the brakes to slow down the economy. While most expect the U.S. economy to post growth upwards of 5 percent in the first three months of the year, very little evidence of accelerating inflation has emerged -- the main reason behind the Fed's recent spate of rate hikes.
    ABS brakes?
    "Most people were afraid that we'd start to see some inflation, but I don't think there's much here," said Robert Brusca, chief economist with Ecobest Consulting. "The Fed still has its foot on brakes and will keep tapping them at regular intervals, but perhaps not as much as investors had been expecting." (369KB WAV) (369KB AIFF)

Indeed, almost all of February's gains came in the form of rising energy and tobacco prices. Energy prices for producers jumped 5.2 percent in February, the biggest increase since October 1990, reflecting a whopping 30.6 percent surge in the cost of home heating oil and a 12.9 percent jump in prices at the pumps for gasoline. In January, producers' energy costs rose 0.7 percent.
    Those increases mirrored the recent surge in oil prices, which have almost tripled in price to as high as $34 a barrel in the past 14 months, reflecting concerns that the Organization of Petroleum Exporting Countries (OPEC) would not boost its output next month to prevent global shortages.
    Tobacco prices, meanwhile, jumped 5.6 percent, more than reversing January's 4.2 percent drop. Cigarette prices rose 6.3 percent as manufacturers such as Philip Morris Cos. (MO: Research, Estimates) raised U.S. cigarette prices to distributors by 13 cents a pack, or about 7 percent. New York State also boosted taxes on cigarettes last month, raising the price on a single pack of 20 cigarettes to around $4.50 from around $4.

Where's the inflation?
    In other categories, food prices increased a moderate 0.4 percent in February, after rising 0.1 percent in January. Prices for new computers fell 3.3 percent, car prices fell 1.2 percent, and prescription drug prices declined 0.2 percent. Intermediate goods prices rose 0.8 percent last month, while crude goods prices rose 4.2 percent.
    So why aren't prices rising? For one, there's productivity. Advances in technology have made companies better at producing and delivering wholesale goods cheaply and efficiently without raising their costs, ensuring prices at the retail level stay the same or even decline in some cases. Worker productivity advanced at a 6.4 percent annual pace in the fourth quarter.

Another reason is competition -- from e-commerce companies on the Internet, from government deregulation of industries such as electricity and telecommunications, and from overseas firms who not only produce goods cheaply, but sell them to American producers in currencies that are worth less than the U.S. dollars those producers use to pay for them.
    All that has led to increased output without higher prices -- a phenomenon that has framed the U.S. economy for more than three years, said Rob Palombi, a markets analyst with Standard & Poor's MMS. What's more, "the U.S. dollar has been on a firming path against the yen and the euro, which should help offset inflation risks on imported goods going forward."
    After reaching near par against the yen in January, the dollar has risen to above 106 yen. It has also made steady ground against the euro, with the euro falling below parity in late January to trade around the 96-cent level.