New claims for jobless aid rose last week while consumer prices notched their largest decline in nearly 1-1/2 years in May, suggesting interest rates will remain ultra low to nurse the fragile economic recovery.
Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 472,000 as manufacturing, construction and education sectors shed workers, the Labor Department said on Thursday.
The unexpected rise in claims was the latest data to suggest the recovery from the worst downturn since the 1930s might have lost some steam. Analysts, however, see little chance of the economy slipping back into recession.
Analysts polled by Reuters had expected claims to fall to 450,000. Last week's data was in the survey period for the government's closely monitored employment report for June. A Labor Department official said states had reported claims in manufacturing, construction and education sectors.
In a second report, the department said its seasonally adjusted Consumer Price Index fell 0.2 percent last month, the largest decline since December 2008, after dipping 0.1 percent in April.
The rise in jobless claims is consistent with the view that the recovery is going to be fairly moderate. We are not going to get the kind of job growth and therefore GDP growth, which is going to generate inflation, said Jim Demasi, chief fixed income strategist at Stifel Nicolaus & Co. in Baltimore.
U.S. stock index futures pared gains and the U.S. dollar extended losses after the data. U.S. Treasury debt prices rose.
The slow labor market recovery is putting a damper on the economy's revival, which started in the second half of 2009.
After falling rapidly last year, jobless claims have made little progress in 2010. Analysts see this as a sign that while layoffs have abated, companies are still not confident enough to add to payrolls, indicating unemployment will remain uncomfortably high for sometime.
Others believe that unemployment benefits, which have been extended because of the gravity of the jobless situation, may be inadvertently contributing to keeping claims elevated.
A near 10 percent unemployment rate is hurting President Barack Obama's approval ratings, and dissatisfaction with the economy could cost the Democratic Party control of Congress in November's mid-term elections.
With unemployment still high and inflation pressures muted, the Federal Reserve is expected to extend its pledge for low interests rates. The U.S. central bank, which meets on Tuesday and Wednesday, is not seen lifting overnight interest rates from near zero until next year.
Analysts polled by Reuters had forecast consumer prices slipping 0.2 percent in May. In the 12 months to May, the CPI rose 2 percent, slowing from the 2.2 percent rise the prior month, also in line with market expectations.
In May, energy prices fell 2.9 percent, the largest decline in more than a year. With energy costs falling, gasoline prices tumbled 5.2 percent - the biggest drop since December 2008. Food costs were flat for the first time since October.
Excluding the volatile energy and food prices, the closely watched core measure of consumer inflation edged up 0.1 percent after being flat in April.
Analysts had expected core prices to rise 0.1 percent. The monthly core inflation rate was bumped up by increases in costs at hotels and motels, and for apparel, tobacco, medical care and used vehicles.
In the 12 months to May, the core inflation rate rose 0.9 percent after increasing by the same margin in April. The rise was also in line with market expectations.
(Reporting by Lucia Mutikani; Editing by Neil Stempleman)