U.S. wholesale prices rose at their fastest pace in five months in September as the cost of gasoline surged, but a small gain in core prices suggested the price pressure was unlikely to be sustained.

While the jump in gasoline prices was seen as a blip, details of the report on Tuesday pointed to enough inflation pressure to keep the bar high for any further loosening of monetary policy by the Federal Reserve.

There is no sign of the deflationary pressures that the Fed was worried about a year ago, so the hurdle for further quantitative easing is higher now than it was then, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The Labor Department said its seasonally adjusted index for prices received by farms, factories and refineries increased 0.8 percent last month after being flat in August. Economists expected prices to increase 0.2 percent.

Stripping out volatile food and energy, the so-called core producer price index rose 0.2 percent after inching up 0.1 percent in August.

Economists expect weak domestic and global growth to curb inflation over the next six to 12 months, although they do not see a risk of falling prices. Last November, the Fed launched a $600 billion bond-buying program to combat deflation risks and to help spur the economy.

Data on Tuesday showed the Chinese economy grew at its slowest pace in more than two years in the third quarter, while German investor confidence dropped to its weakest in nearly three years in October.

U.S. financial markets were little moved by the producer price data. But U.S. stocks rallied in late trade on a newspaper report that France and Germany had agreed to boost a euro zone rescue fund.

Prices for Treasury debt fell and the dollar weakened marginally against a basket of currencies.

PRICES TO EASE GRADUALLY

Gasoline prices jumped 4.2 percent last month, the largest gain since March, after dropping 1 percent in August. Analysts, however, dismissed the spike, saying it was attributable to how the data was adjusted to try to smooth seasonal volatility.

Still, they cautioned that data on Wednesday could show a surprising increase in September consumer prices. The consumer price index likely rose 0.3 percent last month, according to a Reuters survey, after increasing 0.4 percent in August.

Price pressures aren't as elevated as they had been, trend wise, but they have been more persistent than most forecasts had factored in, said Jeremy Lawson, an economist at BNP Paribas in New York. Inflation will moderate over the course of the next six to 12 months, but that moderation will be more gradual than some people had been hoping for.

While the Fed focuses primarily on core consumer inflation, economists said signs of pipeline price pressures could leave the U.S. central bank with less room to maneuver as it weighs further options to help the anemic recovery and pull down an unemployment rate stuck above 9 percent.

The Fed will find it difficult to reach an agreement to introduce another round of quantitative easing with inflation data like these coming against the backdrop of a gradually improving economy, said John Ryding, chief economist at RDQ Economics in New York.

Pressure on the Fed for further monetary stimulus has lessened in recent weeks as data on retail sales and trade suggested economic growth accelerated in the third quarter.

Economists estimate gross domestic product grew at an annual pace of anywhere between 2.3 percent and 2.7 percent, a sharp step up from the second quarter's tepid 1.3 percent rate.

HOUSING SENTIMENT ROSIER

The economy's improving tone is starting to filter through to the ailing housing market.

Home-builder sentiment rose this month to its highest level in nearly 1-1/2 years, although it remained well below levels consistent with improving market conditions, the National Association of Home Builders said in a separate report.

For wholesale prices, gasoline was not the only culprit behind the sharp rise. Food prices rose a relatively steep 0.6 percent last month, although that was a slower pace than in August.

Prices for light motor trucks also increased 0.6 percent -- accounting for a third of the rise in core prices.

Car prices, however, fell 0.5 percent after slipping 0.4 percent in August. They spiked earlier this year because of supply shortages related to Japan's earthquake.

In the 12 months to September, producer prices increased 6.9 percent, accelerating from August's 6.5 percent advance. Core prices were up 2.5 percent over that period, the same as in the year through August.

(Editing by Padraic Cassidy)

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