By Lucia Mutikani
WASHINGTON (Reuters) - U.S. producer prices barely rose in April after strong gains in the first quarter, held back by a moderation in the cost of services such as hotel accommodation and healthcare, which could ease fears that inflation pressures were rapidly building up.
The slowdown in wholesale price growth reported by the Labor Department on Wednesday is, however, likely temporary as manufacturers have been reporting paying more for raw materials. Economists also expect oil prices to surge after President Donald Trump on Tuesday pulled the United States out of an international nuclear deal with Iran.
"Inflation isn't breaking out, although with Trump exiting the Iran nuclear deal, higher energy prices could kick-start a new round of inflation at the producer level," said Chris Rupkey, chief economist at MUFG in New York.
The Labor Department said on Wednesday its producer price index for final demand edged up 0.1 percent last month after increasing 0.3 percent in March. That lowered the year-on-year increase in the PPI to 2.6 percent from 3.0 percent in March.
Economists polled by Reuters had forecast the PPI gaining 0.2 percent last month and rising 2.8 percent from a year ago.
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A key gauge of underlying producer price pressures that excludes food, energy and trade services also nudged up 0.1 percent last month. The so-called core PPI had increased by 0.4 percent in each of the past three months.
In the 12 months through April, the core PPI rose 2.5 percent after jumping 2.9 percent in March.
Core goods prices increased 0.3 percent in April, matching March's gain. Prices for intermediate processed goods increased 0.5 percent while the cost of unprocessed goods shot up 0.9 percent.
"There is building pressure in the pipeline," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Stocks on Wall Street were trading higher, with shares of energy companies getting a boost from surging oil prices after the United States exited the Iran nuclear deal and imposed the 'highest level' of sanctions against the OPEC member.
Crude prices rose to 3-1/2-year highs. U.S. Treasury yields rose while the dollar was little changed against a basket of currencies.
INFLATION NEAR TARGET
Inflation is flirting with the Federal Reserve's 2 percent target. The U.S. central bank's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 1.9 percent year-on-year in March and is expected to breach its target in the coming months.
This comes as last year's big declines in prices of cell phone service plans drop out of the calculation.
Fed officials have in recent days signaled they would not be too concerned if inflation overshot the central bank's target, reiterating a message in a statement issued at the end of a two-day policy meeting last Wednesday.
In that statement, policymakers said they expected annual inflation to run close to the "symmetric" 2 percent target over the medium term. The U.S. central bank left interest rates unchanged last week. The Fed hiked rates in March and has forecast at least two more increases for this year.
In April, the price of services ticked up 0.1 percent. That followed two straight monthly increases of 0.3 percent.
Services were restrained by a 3.2 percent drop in the cost of hotel accommodation, which was the biggest decline since September 2009. The cost of healthcare services fell 0.2 percent after increasing 0.3 percent in March. Those costs feed into the core PCE price index.
Prices for goods were unchanged last month after rising 0.3 percent in March. Wholesale food prices declined 1.1 percent last month, the largest drop since August 2016, after surging 2.2 percent in March.
Food prices were weighed down by sharp declines in the cost of vegetables, eggs and unprocessed finfish.
Gasoline prices fell 0.4 percent in April after dropping 3.7 percent in the prior month.
In a separate report on Wednesday, the Commerce Department said wholesale inventories increased less than initially estimated in March amid declines in the stocks of motor vehicles and a range of other goods.
Stocks at wholesalers rose 0.3 percent instead of the 0.5 percent gain it reported last month. They increased 0.9 percent in February.
"We expect to see more inventory building in the second quarter, which will be a net add to U.S. GDP growth," said Scott Anderson, chief economist at Bank of the West in San Francisco.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)