Consumer prices posted their biggest gain in more than two years in November as energy costs surged and a host of other prices marched higher, damping prospects of further interest-rate cuts from the Federal Reserve.
At the same time, production at the nation's mines, factories and utilities rose a stronger-than-expected 0.3 percent last month, suggesting the economy may have a bit more steam than many analysts had thought.
The Labor Department said on Friday that the U.S. consumer price index jumped 0.8 percent in November, the biggest gain since September 2005, as energy costs leaped 5.7 percent.
Even stripping out fast-rising food and energy prices, the so-called core CPI rose a relatively steep 0.3 percent, the largest increase since January and ahead of the 0.2 percent rise expected on Wall Street.
It puts the Fed in a little bit of a bind and people have to question how aggressive the Fed can be in cutting rates if inflation is rearing its ugly head, said Firas Askari, head currency trader at BMO Capital Markets in Toronto.
U.S. stocks opened down, prices for U.S. government bonds fell and the value of the dollar hit a seven-week high as traders saw the inflation data suggesting slimmer chances of further rate cuts from the Fed, which has lowered borrowing costs by a percentage point over the past three months.
All of these dovish, weak-money individuals out there screaming for rates cuts really need a bucket of cold water in the face because if the Fed goes down that path we may have a bubble in the CPI, said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.
POURING GASOLINE ON THE FIRE
Gasoline prices rose 9.3 percent last month, the steepest climb in half a year. Over the past 12 months, gasoline costs are up 37.1 percent, the biggest one-year rise since September 2005. So far this year, energy costs have advanced at a 18.1 percent annual rate, compared to a 2.9 percent rise last year.
However, the increase in consumer prices was broadly based.
Apparel costs rose 0.8 percent, medical care prices increased 0.4 percent, and owners' equivalent rent -- a gauge of the cost of homeownership that accounts for nearly one-quarter of the overall CPI -- gained 0.3 percent.
The report on consumer prices followed a report on Thursday on prices received by U.S. producers that showed an unexpectedly steep 3.2 percent climb, the biggest increase in 34 years.
Inflation in the 13-nation euro zone was also on the rise last month, with prices up 3.1 percent year-on-year, the steepest gain in six and a half years, a reminder that Fed is not the only central bank struggling to tamp down inflation at a time that growth is threatening to falter.
FACTORY ACTIVITY STIRS
In a separate report on U.S. industrial output, the Fed said factory production rose 0.4 percent in November after a 0.6 percent drop in October, indicating the economy retained some resilience despite being hobbled by a housing downturn.
The manufacturing figure was helped by a 1.7 percent rise in motor vehicle and parts production and a 2.1 percent increase in computer and electronics products output.
Excluding motor vehicle production, industrial output rose 0.2 percent in November.
While industrial activity last month was stronger than economists had expected, the Fed revised its measure of October output downward, saying production declined 0.7 percent, not the 0.5 percent dip originally reported. It was the largest monthly drop since October 2005.
While the industrial production data are encouraging ... less than half of manufacturing industries appear to be growing, said Cliff Waldman, economist for the Manufacturers Alliance/MAPI. The economic climate remains treacherous.
(Additional reporting by David Lawder; Editing by Neil Stempleman)