U.S. producer inflation accelerates in March

(Adds details, new analyst comments)

* Producer prices rise 0.5 percent, largest gain since June

* Core PPI up 0.6 percent, biggest rise in three years

* Consumer sentiment hits nine-month high in April

By Lucia Mutikani

WASHINGTON, April 11 (Reuters) - U.S. producer prices recorded their largest increase in nine months in March, but that jump will probably not ignite inflation pressures as economic growth remains moderate.

The Labor Department said on Friday its seasonally adjusted producer price index for final demand increased 0.5 percent last month, after slipping 0.1 percent in February. The increase last month, which was the largest since June last year, reflected a surge in the prices of food and trade services.

"Will inflation accelerate? Probably, but not rapidly," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "Growing demand should stabilize prices, but the economy is not strong enough to cause inflation to pick up very much."

Economists had expected prices received by the nation's farms, factories and refineries to gain only 0.1 percent in March. Some were puzzled by the increase.

The government recently revamped the PPI series to include services and construction. Its short history made it difficult to gauge a trend, some economists said.

Gus Faucher, a senior economist at PNC Financial Services (NYSE: PNC-WT - news) in Pittsburgh, said harsh weather during the winter could have distorted producer prices.

"But there is also the possibility that inflation may be picking up, as firms raise prices given the recent limited acceleration in wage growth and stronger demand," said Faucher.

A survey on Tuesday showed a significant increase in the share of small businesses raising their prices this month. Fewer reduced prices last month. Government data on Thursday showed an unexpectedly big rise in the price of imported goods in March.

In the 12 months through March, producer prices advanced 1.4 percent. That was the largest increase in seven months and followed a 0.9 percent rise in February.

Last month, prices at the factory gate excluding volatile food and energy costs rose 0.6 percent, the biggest gain in three years. The so-called core PPI for final demand had declined 0.2 percent in February.

A broader gauge of core producer prices - final demand less foods, energy, and trade services - rose 0.3 percent after ticking up 0.1 percent.

In the 12 months through March, core PPI for final demand rose 1.4 percent after increasing 1.1 percent in February.

U.S. financial markets were little moved by the data.

PORK, SAUSAGE PRICES SURGE

Domestic demand could strengthen further with a separate report on Friday showing consumer sentiment hitting a nine-month high in early April.

The Thomson Reuters/University of Michigan's consumer sentiment index rose to 82.6 in early April, the highest since July, from 80.0 in March.

The upbeat household sentiment fit in with other reports such as employment and automobile sales that have suggested the economy was regaining some momentum after a weather-induced lull early this year.

Low inflation has allowed the Federal Reserve to maintain its ultra-easy monetary policy to nurse the economy back to health. Some officials at the U.S. central bank have expressed concern about persistently low inflation and the rise in producer prices could calm their worries.

"They might be pleased with this, particularly if it continues to be a little bit higher. It keeps them on the path they have laid out to tapering and then raising rates down the road," said Kathy Jones, fixed income strategist at Charles Schwab in New York (Frankfurt: HX6.F - news) .

The Fed is scaling back the amount of money it is injecting into the economy every month to keep borrowing costs low. It slashed its benchmark lending rate to a record low of zero to 0.25 percent in December 2008. Many economists expect the Fed to start tightening monetary policy in second half of 2015.

Last month, food prices jumped 1.1 percent, the largest increase since May, after rising 0.6 percent in February.

Food prices were pushed up by a surge in the cost of pork, which saw its largest rise since August 2008. Sausage, deli meat and boxed meat prices rose by the most since August 1980.

Food prices have now risen for a third straight month, in part reflecting a drought in the West. There were also increases in the price of hay, hayseed and oilseeds.

Services for final demand spiked 0.7 percent, the largest gain since January 2010, after falling 0.3 percent in February. The rise was driven by a surge in chemicals, apparel, securities brokerage and dealing, as well as portfolio management. (Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Andrea Ricci and Meredith (Frankfurt: MEZ.F - news) Mazzilli)