U.S. industrial production rose at its fastest pace in four months in November, implying a self-sustaining recovery is now entrenched, but a mild gain in consumer prices indicated still abundant slack in the economy.

Industrial output rebounded 0.4 percent, the Federal Reserve said on Wednesday, the latest data to suggest the recovery gained momentum in the fourth quarter.

However, with inflation barely rising, economists said the pick-up in economic activity was insufficient to discourage the Fed from completing its planned purchase of $600 billion in government bonds to keep borrowing costs tamped down, and weekly data showed mortgage applications fell on high rates.

The economy is picking up momentum as we finish up the year. But the improvement in data is not enough to stop the Fed doing what they are doing, said Neil Dutta, an economist at Merrill Lynch Bank of America in New York.

The closely watched core Consumer Price Index, which excludes food and energy costs, edged up 0.1 percent in November, the first gain in three months, the Labor Department said. Overall consumer prices inched up 0.1 percent, slowing from a 0.2 percent rise in October.

The rise in core CPI matched economists' expectations, but CPI was below the 0.2 percent increase that had been forecast.

Prices for long-dated U.S. government debt fell sharply on the data, which saw investors pricing in higher growth expectations.

The data and ratings agency Moody's warning that it could downgrade Spain's debt helped to spark a U.S. dollar rally, dragging stocks on Wall Street lower <.SPX>. Moody's warning revived worries about the sovereign debt crisis in the euro zone.

UTILITIES BOOST OUTPUT

Utility output surged 1.9 percent last month and manufacturing increased 0.3 percent, despite a steep drop in vehicle production.

Continued strength in manufacturing, which has been the star performer during the recovery, was underscored by a strong rebound in a gauge of manufacturing in New York state in December.

Adding to the brightening economic picture, credit card delinquency rates fell at major domestic lenders last month as fewer consumers fell behind on bill payments.

Fed officials took little note of the improving tone of economic data after a policy meeting on Tuesday, however, and kept the spotlight on high unemployment and low inflation.

Economists parsing the latest report on consumer prices on Wednesday said it was likely that a slowing in core inflation, which had been troubling the Fed, had now run its course.

In the 12 months to November core CPI gained 0.8 percent, edging up from October's record low 0.6 percent but staying way below the Fed's comfort zone of 1.6 to 2.0 percent inflation.

We have been expecting inflation to bottom out in the fourth quarter, mostly driven by the end of falling shelter costs. We are seeing some of that occurring, said Troy Davig, senior U.S. economist at Barclays Capital in New York.

Shelter costs edged up 0.1 percent in November, the second consecutive month of gains as measures of rental costs moved higher. Economists expect rental prices, which account for about 40 percent of core CPI, to keep rising through 2011.

New vehicle prices slipped 0.4 percent in November, extending the prior month's fall. Prices for used cars and trucks fell for a third straight month. Apparel rose 0.2 percent after falling for three straight months.

Despite signs of a pick-up in broader economic activity, housing continues to lag. Applications for home loans dropped last week as mortgage rates rose for a fifth consecutive week to touch seven-month highs, the Mortgage Bankers Association said.

Adding to the downbeat outlook for housing, home-builder sentiment was mired at record lows in December, a National Association of Home Builders/Wells Fargo survey showed.

(Additional reporting by Pedro Nicolaci da Costa and Corbett Daly; Editing by James Dalgleish)

Inflation Consumer price index