Consumer prices increased at their fastest pace in more than 1-1/2 years in February as fresh data showed growth was accelerating, but underlying inflation pressures remained generally contained.
Some economists expressed concern that the deepening crisis in Japan could hurt U.S. growth in the weeks and months ahead but they cautioned it was too soon to know for sure.
Positive signs for the U.S. economy from data on Thursday included claims for new unemployment benefits, which fell last week, and factory activity in the country's Mid-Atlantic region, which expanded at its quickest rate in 27 years.
Economists said the reports were an encouraging sign for Federal Reserve officials whose massive efforts to stimulate growth through government bond purchases were aimed both at boosting the labor market and preventing prices from falling.
There are signs here the pace of growth has picked up and if the Fed was worried about inflation being too slow, they can forget about it, said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh. The Fed needs to worry about inflation expectations because they are much more fickle.
The Fed, which wants to ensure an inflationary psychology does not take root, said on Tuesday it was watching inflation and expectations for future prices closely, but that the upward price pressure from commodities should be temporary.
While the U.S. central bank see inflation expectations as anchored, consumers feeling the pinch of high energy and food costs think inflation will likely worsen.
Large gains in food and energy costs have propelled inflation sharply higher over the past three months. In February, the Consumer Price Index rose 0.5 percent, the largest increase since June 2009, the Labor Department said.
Energy prices last month rose 3.4 percent after increasing 2.1 percent in January, while food prices increased 0.6 percent, the largest gain since September 2008.
Other prices, however, have been largely muted and the core CPI -- excluding food and energy -- rose just 0.2 percent, suggesting surging commodity costs had yet to generate a broad inflation that would spur the Fed into action.
Instead, analysts say the jump in food and energy prices is likely to undercut other spending and restrain the recovery, encouraging the Fed to keep its economic support in place.
The Fed has a green light to continue ... in view of the short-term downside risks to the outlook for growth related to the recent spike in gasoline prices, and the massive disruptions to production in the Japanese economy, said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts.
LABOR MARKET HEALING
For now, the economy appears to be weathering the high energy costs, although analysts remain wary of the effects of Japan's devastating earthquake and tsunami.
Initial claims for state unemployment benefits fell 16,000 to 385,000 last week, the U.S. Labor Department said in another report, with the four-week moving average hitting its lowest since mid-July 2008.
The data covered the survey period for the government's closely tracked employment report for March.
This supports a good print on March payrolls, said Ellen Beeson Zentner, a senior U.S. economist at the Bank of Tokyo-Mitsubishi UFJ in New York.
But she offered a word of warning: If supply disruptions and stock market volatility persist we could see businesses put hiring on hold and April job growth could slow.
Companies appear to be taking the high energy prices and the devastation in Japan in stride. FedEx Corp, the world's largest cargo airline, forecast improved revenue and margins in the current quarter and beyond. It also said it saw more shipments for reconstruction in Japan.
The outlook from FedEx helped U.S. stocks bounce back from three days of selling, pulling the Standard & Poor's 500 index back into positive territory for the year.
Prices for U.S. government debt fell as investors skimmed profits off a safe-haven rally this week. The dollar eased off record lows against the yen amid fears Japanese authorities might intervene to curb the currency's rapid ascent.
In another sign the economy was strengthening, the Philadelphia Federal Reserve Bank's business conditions index rose to 43.4 in March -- the highest since January 1984 -- from 35.9 in February.
A separate report from the Fed showed industrial output slipped 0.1 percent in February, pulled down by a 4.5 percent plunge in utility production. Manufacturing output, however, rose 0.4 percent, showing the sector was still helping to drive the economy's recovery.
(Additional reporting by Glenn Somerville and Pedro Nicolaci da Costa; Editing by James Dalgleish)