Core wholesale prices rose in January at their fastest rate in more than two years, raising some concerns about inflation, but economists said the recovery was too weak for a big spike in consumer prices.
The core producer price index, which excludes food and energy costs, increased 0.5 percent, the biggest advance since October 2008, the Labor Department said on Wednesday. Economists had expected a 0.2 percent gain.
Investors viewed the figures somewhat warily and bond prices slipped. Economists, however, said it was too soon to panic about inflation with stubbornly high unemployment keeping labor costs subdued.
The question is whether we are seeing a limited pass-through of commodity price hikes or the beginnings of an inflationary spiral, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
Wages will be the thing to watch -- there won't be an inflationary spiral unless wage inflation picks up.
The rise in core PPI reflected a jump in drug prices, which accounted for 40 percent of the increase.
Other reports on Wednesday indicated that while growth may be quickening, the recovery remains uneven. Industrial production edged down in January and housing construction continued to bounce along the bottom. But bad weather might have distorted the industrial output data.
Stocks gained on strong earnings from technology bellwether Dell and a deal for Sanofi-Aventis SA to buy Genzyme Corp for $20.1 billion in cash.
NO PASS-THROUGH TO CONSUMERS
The rise in core PPI comes at a time when a surge in commodity prices has caused many economies to raise red flags on inflation.
The U.S. Federal Reserve has so far shown little concern about price pressures and officials have repeatedly said core consumer inflation remains too low. The central bank is widely expected to complete its planned purchases of $600 billion in government bonds to assist the recovery.
Minutes of the Fed's January 25-26 policy meeting released on Wednesday showed officials expected inflation to stay subdued and measures of core inflation would remain close to current levels in coming quarters.
Most economists agree with the Fed's stance on prices. The government is expected to report on Thursday that core consumer prices rose 0.1 percent in January from December.
Yes, we are seeing input prices go up, companies are seeing those, but they are having a hard time passing them on. There is still a lot of slack in the economy, whether it's high unemployment or high office vacancies, said John Canally, an economist at LPL Financial in Boston.
The economy is 80 percent services. Economy-wide, raw materials or commodity prices only account for something like 5 percent of input costs and labor is 70 percent.
Companies such as Coca-Cola, PepsiCo, Kraft and Procter & Gamble are raising prices of some goods to offset the high energy and commodity costs. But economists are skeptical that most price increases by producers will stick.
INDUSTRIAL OUTPUT DIPS
A separate report from the Fed showed industrial production slipped 0.1 percent in January, the first decline since June 2009, after rising 1.2 percent in December. Capacity utilization, a measure of how fully firms are using their resources, dipped to 76.1 percent from an upwardly revised 76.2 percent.
Economists were not too concerned about the fall in industrial production as a return to more normal winter temperatures caused a sharp fall in utility output. Mining production also fell, but factory activity increased.
As with many other indicators, we suspect that weather depressed the January result, but (we) will have to wait at least another month for confirmation. said Michelle Girard, an economist at RBS in Stamford, Connecticut.
While the rest of the economy has been strengthening, recovery continues to elude the housing market.
Housing starts jumped 14.6 percent to a seasonally adjusted annual rate of 596,000 units in January, but permits for future building fell 10.4 percent, the Commerce Department said in a third report.
In addition, the rise in starts reflected a pickup in groundbreaking for multifamily units. Starts fell in the more-stable single-family home category
We still have a significant amount of inventory of unsold homes and that keeps getting fed by homes going through the foreclosure process, said Peter Muoio, a senior principal at real estate research firm Maximus Advisors in New York.
In the near-term there is no need to build a lot of new homes.
An independent survey on Tuesday showed sentiment among home builders hovering near all-time lows in February.
(Additional reporting by Mark Felsenthal and David Lawder; Editing by Andrea Ricci)