Producer price gain offers cautionary note on U.S. inflation

* Producer prices up 0.6 percent, largest rise in 1-1/2 years

* Core PPI increases 0.5 percent, above expectations

* Revamped data series raises eyebrows on price pressures (Adds details, analyst comments, updates markets)

By Lucia Mutikani

WASHINGTON, May 14 (Reuters) - U.S. producer prices recorded their largest increase in 1-1/2 years in April as food prices surged, in a potential sign inflation pressures may be creeping up.

The Labor Department said on Wednesday its producer price index rose 0.6 percent, the biggest gain since September 2012. That built on a March increase that was nearly as large.

The department revamped it PPI series at the start of the year to include services and construction. Since then, it has been surprisingly volatile, largely because of big swings in prices received for trade services.

Still, economists, who had expected only a 0.2 percent gain, saw the latest rise as an indication that price pressure may be building. Officials at the Federal Reserve have long worried that inflation was running too low.

"We think a number of policymakers at the Fed and many market participants are overly complacent on the outlook for inflation," said John Ryding, chief economist at RDQ Economics in New York (Frankfurt: HX6.F - news) . "We are not sounding an inflation alarm at this point but ... concerns about deflation or too low of an inflation rate seem quite misplaced at this point."

In the 12 months through April, prices received by the nation's farms, factories and refineries advanced 2.1 percent. That was the biggest gain since March 2012 and up from a 1.4 percent rise in the period through March.

LOW INFLATION BACKDROP

Despite the quicker pace of inflation at the wholesale level, the overall inflation backdrop in the United States remains benign given the slack in the labor market left over from the recession. With wage growth tepid, it will be difficult for producers to pass on all the price increases to consumers.

Low inflation is one of the main reasons the U.S. central bank is keeping monetary policy extraordinarily loose. Although it is cutting back the amount of money it is injecting into the economy through monthly bond purchases, it is not expected to raise overnight interest rates before the second half of 2015.

"The Fed will be watching to see if the recent pickup in PPI inflation carries through to consumer inflation. But unless inflation accelerates much more dramatically, the Fed will likely maintain its current monetary policy," said Stuart Hoffman, chief economist at PNC Financial (Other OTC: PNCXL - news) in Pittsburgh.

Consumer price data, to be released on Thursday, is expected to show the consumer price index rising 0.3 percent in April, according to a Reuters poll of economists. Excluding food and energy, prices are seen up just 0.1 percent.

Last month, wholesale food prices surged 2.7 percent, a fourth straight monthly gain and the biggest since February 2011. The cost of meats rose by the most since October 2003.

A drought in California has put upward pressure on prices, which has already filtered through to the supermarket.

But rising food costs were far from the only factor driving producer prices higher last month.

Prices received for services at the final demand level gained 0.6 percent after rising 0.7 percent in March. Increasing margins for trade - an implicit profit measure - accounted for two-thirds of the rise in services last month.

In contrast, energy prices rose a tame 0.1 percent.

Producer prices excluding food and energy costs increased 0.5 percent in April after the prior month's 0.6 percent gain.

Part of the increase in this core PPI measure was due to a 1.4 percent jump in light motor truck prices.

In the 12 months through April, the core PPI for final demand rose 1.9 percent, the most since December 2012 and a sharp step up from the 1.4 percent increase logged in the period through March.

"Rising food and core input costs show pipeline pressures building," said Sam Bullard, a senior economist at Wells Fargo (Berlin: NWT.BE - news) Securities in Charlotte, North Carolina. (Reporting By Lucia Mutikani; Editing by Andrea Ricci)