Consumer prices rose at their fastest pace in more than 1-1/2 years in February, driven by higher food and energy prices, but underlying inflation pressures remained generally contained.
Other data on Thursday showed economic growth was accelerating, with claims for new unemployment benefits falling last week and factory activity in the country's Mid-Atlantic region expanding at its quickest rate in 27 years.
Economists said Thursday's reports would be an encouraging sign for Federal Reserve officials whose efforts to stimulate the economy through bond purchases were aimed at preventing prices from declining and boosting the labor market.
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. What the Fed needs to worry about is inflation expectations because they are much more fickle.
Large gains in food and energy costs have propelled inflation sharply higher over the past three months. The Consumer Price Index rose 0.5 percent in February, the largest increase since June 2009, the Labor Department said.
Other prices, however, have been largely muted and the core CPI -- excluding food and energy -- rose just 0.2 percent.
Though the increase in core prices was slightly above economists' expectations, it suggested surging commodity costs had yet to generate the type of broad inflation that would spur the Fed into action.
The Fed said on Tuesday it expected the upward price pressure from commodities to be temporary but it would closely monitor inflation and inflation expectations.
The Labor Department said initial claims for state unemployment benefits fell 16,000 to 385,000 last week, hinting at a strengthening in the labor market. A four-week moving average of new claims -- a better measure of underlying trends -- dropped to its lowest level since mid-July 2008.
The closely watched average has now stayed below the 400,000 level for a third straight week. Economists say claims below that level indicate improving labor market conditions.
Rising food and energy costs have put monetary authorities on edge in some major economies, but high unemployment in the United States is restraining wage growth and tempering the inflation pressure coming from strong commodity prices.
Adjusted for inflation, average hourly earnings fell 0.5 percent in January, the department said. Over the past year, they have fallen 0.4 percent.
In another sign the economy was strengthening, the Philadelphia Fed's business conditions index rose to 43.4 in March -- the highest since January 1984 -- from 35.9 in February.
That helped to assuage fears of a slowdown in production after an earlier report on Thursday from the Fed showed industrial output slipped 0.1 percent dip in February, pulled down by a 4.5 percent plunge in utility production that the central bank pinned on unseasonably warm weather.
Manufacturing output rose 0.4 percent, showing the sector was still helping to drive the economy's recovery.
However, economists are worried the devastating earthquake and tsunami in Japan could hamper economic growth.
To the extent that confidence and household wealth, via equities are negatively impacted, some firms may be inclined to scale back production plans, said Michelle Girard, an economist at RBS in Stamford, Connecticut.
In the auto sector, while assemblies at some plants may be hurt by supply-chain disruptions, those automakers unaffected by the Japanese situation may boost domestic production in an effort to gain market share while imports are restrained.
Separately, the Conference Board's index of leading indicators rose 0.8 percent in February, following a 0.1 percent gain in the prior month.
While core inflation has remained subdued, the report on consumer prices offered fresh evidence that it had bottomed after a long slide lower.
Core consumer prices were lifted by increases in airline fares, new vehicles, shelter and medical care. Shelter costs, which account for about 40 percent of core CPI, rose 0.1 percent for a fifth straight month.
Over the past year the core CPI was up 1.1 percent, the largest increase in a year. Fed officials, who view the core index as a good predictor of future inflation, would like to see that figure closer to 2 percent.
Energy prices last month rose 3.4 percent after increasing 2.1 percent in January. Food prices increased 0.6 percent, the largest gain since September 2008.
In the 12 months to February, overall consumer prices rose 2.1 percent, the largest increase since April 2010.
(Additional reporting by Glenn Somerville and Pedro Nicolaci da Costa)