WASHINGTON - Producer prices rose by a larger-than-expected 1.4 percent in May after another jump in energy prices, but core inflation at the producer level moderated as forecast, government data on Tuesday showed.
The dollar slipped and US government Treasury bonds held their ground on the tame reading on core inflation and after a separate report showed US housing starts fell in May to their lowest level in more than 17 years.
"We have very weak housing with no sign yet of a turnaround and meanwhile rising food and energy costs are boosting wholesale inflation," said Gary Thayer, senior economist at Wachovia Securities in St. Louis.
Economists polled by Reuters had expected producer prices -- a gauge of costs at the farm and factory gate -- would rise 1.0 percent after increasing 0.2 percent in April.
The Labor Department said producer prices over the last 12 months were up 7.2 percent in May, the eighth consecutive month prices rose more than 6 percent on a yearly basis.
The last time PPI produced this many straight months of above 6 percent year-over-year readings was the period between 1977 and 1982, a Labor Department official said, when the economy was stagnating amid soaring inflation.
"These numbers suggest that the Fed probably has to monitor both economic growth and inflation carefully. We think the Fed will hold rates steady for the time being," said Thayer.
The US central bank has slashed its key interest rate 3.25 percentage points to 2 percent since September to shield the economy from a collapsing housing market. It has signaled it will now go on hold while it watches growth and inflation, and expects price pressures to ease in the months ahead.
Core producer prices, which strip out volatile energy and food costs, increased by 0.2 percent as expected, slowing from a 0.4 percent gain in April.
Core prices were up 3.0 percent compared with a year ago, matching the pace of the previous month and still the fastest increase since 1991, the Labor Department said.
Gasoline prices at the producer level rose 9.3 percent and were 26.3 percent higher over 12 months.
"I think we have a little bit of inflation but certainly not runaway inflation. The inflation story would fade quickly if oil pulls back below $120 per barrel," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.
US oil was trading at nearly $133 per barrel on Tuesday.
In other data, the Commerce Department said US home building projects started in May fell by 3.3 percent to a lower-than-expected annual rate while building permit activity, a sign of future construction plans, dropped off 1.3 percent.
Housing starts set an annual pace of 975,000 units in May, the lowest since March 1991. Economists polled ahead of the report were expecting a 980,000 unit rate.
"Housing numbers are more interesting -- they're starting to form a lower lip. I think that's more evidence on the pile that maybe housing is beginning to bottom," said Paulsen.
A separate Commerce Department release showed the US current account deficit widened by a larger-than-expected margin in the first quarter to $176.4 billion from $167.2 billion in the fourth quarter.
The first-quarter current account deficit equaled 5.0 percent of gross domestic product, up from 4.8 percent in the fourth quarter.