Producer prices surged in February at their fastest pace in 1-1/2 years, data showed on Wednesday, a day after the Federal Reserve said it had a watchful eye on inflation pressures it expects to subside.

In another reminder on Wednesday of the headwinds facing the economy, the government said groundbreaking for new homes posted the biggest drop in 27 years, and permits for future building reached a record low.

Economists said the jump in food and energy costs that drove the U.S. producer price index higher last month would likely steal from other spending and slow growth.

I don't believe that this is a general rise in prices across the board, it's not the stuff of an inflationary spiral, but you are starting to have some pricing pressures, said Brian Levitt, an economist at OppenheimerFunds in New York.

The data and the escalating nuclear emergency in Japan pulled down U.S. stocks. Investors were still trying to come to grips with what impact the devastating earthquake and tsunami could have on the global economy.

Economists believe the U.S. economy should be able to withstand the shock from the oil price spike and any spillover effects from the devastation in Japan. Bond prices rose as traders saw the surge in prices and drop in housing starts as likely to impede the recovery, but the data had little impact on currencies.

The PPI, which measures prices received by farms, factories and refineries, jumped 1.6 percent last month, the largest increase since June 2009, the Labor Department said. The gain was more than double economists' expectations.

In the 12 months to February, producer prices were up 5.6 percent, the biggest rise since March 2010.

Economists said given the lofty level of U.S. unemployment and lack of wage-driven price pressures, they did not expect the strong producer prices to pass through to consumers on a large scale.

You are seeing inflation on the goods side, you don't see it on the service side. This is a service economy and inflation will be driven more by wages and to this point wages are reasonable, said Levitt. But on Main Street, you will certainly feel the shock whether it is at the gas pump or the supermarket.

A report on Thursday is expected to show the core Consumer Price Index increased just 0.1 percent in February, according to a Reuters survey, slowing from the prior month's 0.2 percent gain, which was the largest in more than a year.


The report on home building from the Commerce Department painted a bleak picture for a market lumbered by a vast backlog of unsold inventory.

Housing starts tumbled 22.5 percent last month to an annual rate of 479,000 units, just shy of a record low set in April 2009 and way below economists' expectations for 570,000 units.

Permits for future building hit 517,000 units, the lowest on records dating to 1960.

While the collapse in construction led some economists to trim their economic growth estimates for the first quarter, many saw the decline merely as a correction after a hefty January increase.

We still expect that the strengthening economic recovery will spark consumer demand, leading residential construction to pick up this year, said Celia Chen, a senior director at Moody's Analytics in West Chester Pennsylvania.

Given their low inventories, builders will need to construct more homes to satisfy demand once it ramps up.

A separate report showed applications for home loans dipped last week, suggesting still-stunted demand ahead of the spring selling season.

The increase in wholesale prices was broad-based.

Energy prices surged 3.3 percent -- the biggest advance since January 2010 and an increase that built on January's 1.8 percent rise. Gasoline prices rose 3.7 percent to account for more than 40 percent of the overall gain in energy costs.

Food prices jumped 3.9 percent, the biggest increase since 1974, and some economists blamed the increase on bad weather.

Stripping out volatile food and energy costs, core producer prices rose 0.2 percent last month, matching expectations and easing after a 0.5 percent rise in January.

The core PPI was lifted by a 1.0 percent increase in apparel, which was the biggest rise since 1990, while passenger cars rose 0.6 percent.

In the 12 months to February, the core producer price index rose 1.8 percent, the largest increase since August 2009.

(Additional reporting by Pedro da Costa; Editing by Andrea Ricci and Neil Stempleman)