U.S. producer prices rose faster than expected in November, while a gauge of manufacturing in the New York state unexpectedly fell this month, creating a potential headache for the Federal Reserve.

The Labor Department said on Tuesday the seasonally adjusted index for prices paid at the farm and factory gate jumped 1.8 percent, the largest gain in three months, following a 0.3 percent rise in October. Prices were pushed by strong energy and light truck vehicle costs.

Analysts polled by Reuters had expected producer prices to increase by 0.8 percent last month.

A separate report showed a barometer of manufacturing in New York State unexpectedly plummeted in December, indicating a slowdown in factory activity, while prices paid by manufacturers rose.

I think today's data is pretty consistent with the story we've been telling: This is a gradual, uneven recovery, not the short bounce back we've seen after most postwar recessions, said Zach Pandl, economist at Nomura Securities in New York.

U.S. stock index futures and Treasury debt prices extended losses on the data.

The data came as the Federal Reserve prepared to start a regular two-day meeting to deliberate on monetary policy.

The U.S. central bank is expected to leave interest rates steady near zero, but analysts will been keen to see if it maintains its pledge to keep borrowing costs ultra low for an extended period.


Analysts said the surprise rise in PPI and signs of price pressures within the New York factory survey could spark speculation the Fed might move more quickly to raise rates than the market has been expecting.

It could give ammo to the inflation hawks and prompt (Fed Chairman Ben) Bernanke to pull the trigger on rates, said Dan Cook, senior market analyst at IG Markets in Chicago.

Compared with the same period last year, producer prices surged 2.4 percent in November, posting their first gain in a year and the largest rise since October 2008.

Markets had expected producer prices to increase 1.6 percent versus a year ago.

The New York Federal Reserve said its Empire State general business conditions index fell to 2.55 in December from 23.51 in November. This was the biggest monthly decline on record and the lowest reading since July 2009 when it was at minus 0.55.

Economists polled by Reuters had expected a December figure of 24.00. Despite December's sharp fall, the index is still well above a record low reached in March.

In the PPI report, gasoline prices rose 14.2 percent month, eclipsing a sharp moderation in food price increases.

Crude oil prices hit $82 a barrel in late October but have since retreated sharply. On Tuesday, crude oil was trading around $70 a barrel.

Core producer prices, which exclude food and energy costs, rose a larger-than-expected 0.5 percent last month after surprising markets with a 0.6 percent fall in October. The core index had been forecast to rise 0.2 percent in November. Core prices last month were lifted by a rebound in prices for light motor trucks.

The core producer price index rose 1.2 percent measured on a year-on-year basis, versus a forecast for a 0.9 percent gain. The core index, excluding cars and light trucks, rose 0.2 percent from October. Light motor truck prices, which had depressed core producer prices in October, rose 4.2 percent last month, the largest gain since November 2006.

(Additional reporting by Richard Leong, Ryan Vlastelica and Emily Flitter in New York; Editing by Andrea Ricci)