The U.S. Labor Department announced Tuesday producer prices surged 1.0% in January 2008 on energy costs, well above the 0.3% consensus estimate.

Meanwhile, the core PPI rate, which excludes food and energy costs, increased 0.4%, also well above the 0.2% estimate.

The 1% January 2008 PPI increase follows a 0.3% increase in December 2007.

Economist Steve Affinito told BloggingStocks Tuesday the January PPI stat is going to make it very rough for the U.S. Federal Reserve to maintain low interest rates for a long period of time.

Fed won't be pleased

"Wow! This number is hot, really above what we expected," Affinito said. "This almost guarantees that the Fed will be raising interest rates in a year about as fast as they lowered them this year. We have accelerating inflation at the wholesale level, so expect the Fed to clamp down on these inflationary pressures at the first sign they believe the economy is growing."

Affinito added that he still believes the Fed will lower the fed funds rate by 50 basis points to 2.50% when it meets next, but rising inflation will constrain the Fed after that.

"Rising inflation, driven mostly by surging oil costs are really making things hard for the Fed," Affinito said. "The Fed wants to stimulate growth but PPI will force them to put the lid on their easing monetary policy probably before they want to. This report provides a lot of evidence for the Fed's hawks."

Further, during the past 12 months, producer prices rose 7.4%, the most since October 1981. The core rate, excluding food and energy, increased 2.3% during the same period.

During January 2008 energy costs increased 1.5%, gasoline jumped 2.9%, food prices climbed 1.7%, prescription drugs rose 1.5%, and intermediate goods climbed 1.4%.