Factory prices have risen strongly led by higher energy bills

Prices paid to US producers rose 3.2% in November, the highest monthly gain since 1973, said the Labor Department.

Most of the rise was caused by food and energy price increases, which would normally lead to higher interest rates.

Yet earlier this week, the Federal Reserve cut rates by a quarter-point to ease the housing and credit slump.

It reduced rates from 4.5% to 4.25%, its third cut in as many months.

The Fed said that despite the latest reduction, it would "continue to monitor inflation developments".

'Intensifying inflation'

Excluding food and energy bills, core factory prices rose 0.4% in November, the highest rise since February.

In terms of the retail sales, these numbers should put some of the fears to rest that consumers are going to stay at home this holiday season

Mark Vitner, economist at Wachovia Securities

Separate official data on Thursday, showing stronger-than-expected US retail sales in November, also suggested the Fed might not have had to cut rates so extensively.

Retail sales rose 1.2% last month, twice as much as market forecasts, said the Commerce Department.

It was the biggest monthly gain in retail sales since January 2006, indicating that US consumer confidence remains resilient despite continuing woes in the housing and credit markets.

"Excluding food and energy prices, we are still seeing intensifying inflationary pressures," said Mark Vitner, economist at Wachovia Securities.

"And that's one of the reasons why the Fed is having to be as cautious as it has been, in terms of not cutting by half a percentage point every time, like the financial markets seem to want it to.

"In terms of the retail sales, these numbers should put some of the fears to rest that consumers are going to stay at home this holiday season."

Market concerns

The latest figures appeared to do little to cheer investors, with all three main US share indexes falling in morning trading in New York.

Wall Street's main Dow Jones index was down 60 points to 13,414.

"Concerns about the economic environment have not gone away," said Stephen Briggs, economist at SGCIB.

"The figures at lunchtime suggest there is an inflation problem and Fed's got a difficult job."