Rising prices for food, cars and electricity fanned inflation at U.S. factories and farms in January, while higher gasoline prices in early February caused consumers to be less upbeat, according to data on Friday.

The inflation data helped financial markets, which are already counting on an increase in interest rates when the Federal Reserve meets in March, cement their expectations for another rate rise after that.

The Labor Department said U.S. producer prices rose by 0.3 percent in January while prices excluding food and energy climbed 0.4 percent. The latter was twice expectations and the fastest wholesale inflation since January 2005.

"The most disconcerting part of the PPI report today was the rate of final core producer price pressures in January," said Jason Schenker, an economist at Wachovia Corp in Charlotte.

"The implication is that core inflation may be rising. If we see similar moves in the core CPI number, we are even more likely to see Fed hikes in March and May," he said.

The rise in the producer price index, a gauge of prices received by farms, factories and refineries, fell short of December's downwardly revised 0.6 percent gain but outstripped Wall Street forecasts for a 0.2 percent rise.

The 0.4 percent rise in the core PPI, which excludes food and energy, was double economists' forecasts for a 0.2 percent gain, suggesting underlying inflation pressures were higher last month than financial markets had expected.

The dollar pared back some of its earlier gains after a separate report showed consumers were less optimistic in early February. The University of Michigan said its preliminary index of consumer sentiment in February fell to 87.4 from 91.2 in late January.

U.S. blue chip stocks extended a slide triggered by a disappointing outlook from computer maker Dell Inc. (DELL) and a rise in oil prices.

But U.S. Treasury debt rallied in price after the weak consumer sentiment data. Treasuries had already priced in much of the expectation that the Federal Reserve will have to keep raising rates to contain inflation.

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The Fed has raised short-term interest rates 14 times since June 2004 to relieve the pressure of rising prices.

"What I find troubling is more increases in the core and intermediate levels so there're more [price] pass-throughs," said Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio.

"Does the Fed stop raising rates after March? No. If these figures stay hot, they are going to keep raising," he added.

The producer price index was up 5.7 percent from January 2005, driven mostly by a 25 percent surge in the price of finished energy goods. However, core prices have increased just 1.5 percent in the last 12 months, suggesting energy price increases have not yet passed through to other goods.

Energy prices were flat in January. The cost of residential electricity soared a record 3.0 percent, while the price of residential natural gas climbed 0.8 percent. But those increases were offset by a 3.5 percent drop in the price of gasoline and a 6.8 percent decline in liquefied petroleum gas.

Food costs rose 0.2 percent after a hefty 0.8 percent gain in December.

The Labor Department said the price of passenger cars climbed 1.1 percent, while the price of light trucks was up 0.7 percent and civilian aircraft prices were 0.7 percent higher.

Economists commenting on the University of Michigan consumer sentiment survey attributed much of February's weakening to the spike in gasoline prices early in the month.

But the report did not suggest consumers will curb their spending, especially after this week's robust January retail sales report, which showed a 2.3 percent rise.

"We had seen the daily and weekly sentiment surveys show a small dip in consumer attitudes at the end of January. Some of that could have been related to the late January rise in energy prices and the news from the Middle East, especially Iran." said Gary Thayer, chief economist at AG Edwards & Sons in St. Louis.

"Fortunately, energy prices are coming down again, and the employment situation still looks good, so we could see sentiment hold at a relatively healthy level in upcoming reports."

The index of current conditions fell to 107.7 from 110.3, while the expectations component fell to 74.4 from 78.9.