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WASHINGTON -- Wholesale inflation shot up by a surprising 1.1 percent in January, the biggest jump in a decade, reflecting a record rise in natural gas prices and higher costs for food, cars and cigarettes. Industrial production fell for the fourth straight month.

The Producer Price Index, which measures inflation pressures before they reach store shelves, followed a mild 0.2 percent increase in December, the Labor Department reported today.

Many analysts had expected a 0.3 percent rise in January.

The leap was led by record price increases for natural gas used in homes, for powering electric utilities and in industrial production.

The report "does raise some warning flags" about accelerating inflation, said Peter Kretzmer, an economist at Banc of America Securities in New York.

The PPI report also showed that prices for goods other than food and energy products -- which can swing widely from month to month -- rose a sharper-than-expected 0.7 percent in January, following a slim 0.1 percent rise the month before. Analysts were forecasting a 0.1 percent rise in this "core" rate of inflation.

The 0.7 percent reading in the core rate was the highest since a 1.0 percent rise in December 1998.

In another report, the Federal Reserve said output at the nation's factories, mines and utilities dropped by 0.3 percent in January, further evidence of the economic slowdown. Many analysts had expected a stronger showing, following the steep 0.5 percent decline posted
in December.

January's performance was led by a sharp, 6 percent decline in output at gas and electric utilities, reflecting moderating temperatures after December's extreme cold.

Operating capacity, meanwhile, fell to 80.2 percent in January, the lowest since August 1992, as companies cut back in response to slackened demand.

The Federal Reserve slashed interest rates by a full percentage point in January, in an effort to prevent the weakening economy from slipping into a recession. One of the reasons Fed policy-makers cited for being able to act so aggressively was that inflation -- outside the burst in energy prices -- had remained in check.

One area of the economy that has held up well during the sharp economic slowdown has been the housing sector. That strength was evidenced in another report Friday from the Commerce Department showing that new housing construction rose by 5.3 percent in January to a seasonally adjusted annual rate of 1.65 million units.

The 1.1 percent rise in wholesale prices was the largest since a 1.3 percent increase registered in September 1990.

In January, energy prices rose 3.8 percent, the biggest increase since a 6.1 percent spike in June.

Residential natural gas prices rose by an all-time monthly high of 11.3 percent. Liquefied petroleum gas, such as propane, rose 15.3 percent, the biggest increase since July. Gasoline prices rose 1.6 percent and residential electric power costs went up by 1.4 percent.

Meanwhile, prices for food items rose 0.8 percent in January, the largest gain since a 1.1 percent rise in April.

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