The rise in producer prices suggests the Federal Reserve's concern about falling inflation may not be warranted. In leaving its benchmark interest rate at 1 percent on Tuesday, the central bank said tame inflation would allow it to keep rates at that 45- year low ``for a considerable period'' to boost growth.

``The Fed keeps saying, `Trust me, we're going to have deflation.' Well, where is it?'' said Robert Podorefsky, interest- rate strategist at FleetBoston Financial Corp. in Boston.

The 4 1/4 percent note maturing in August 2013 fell about 1/2, or $5 per $1,000 face amount, to 97 at 9:23 a.m. in New York, according to Zions Bank. Its yield rose 6 basis points, or 0.06 percentage point, to 4.62 percent, the highest since July 2002.

The yield on the benchmark note extended to 1.5 percentage points its climb from a 45-year low in mid-June on signs low interest rates and tax cuts are fueling economic growth, which may lead to higher inflation.

Wholesale prices excluding food and energy rose 0.2 percent in July after falling 0.1 percent in June, the Labor Department said today. The median forecast of economists polled by Bloomberg News forecast core producer prices would be unchanged.

A Labor Department report tomorrow is expected to show consumer prices excluding food and energy costs rose 0.1 percent in July after showing no change the previous month, according to the median forecast.

Jobless Claims

So-called core consumer prices rose 1.5 percent in the 12 months ended in June, matching a 37-year low first reached in April. Forecasts for July suggest annual inflation will remain at that level in July.

Adding to evidence economic growth is accelerating, a separate Labor Department report showed initial jobless claims numbered 398,000 last week, compared with a revised 396,000 the previous week. The count fell below 400,000 for the first time since February three weeks ago and has remained at that level, which many economists say is the border between an expanding and contracting labor market.