Producer prices up on energy rise in May

WASHINGTON (Reuters) - A big jump in energy costs sharply pushed up prices that U.S. manufacturers and wholesalers paid for goods last month, but outside of energy the inflation picture looked tame.

Producer prices rose by 0.9 percent in May, the Labor Department said. But excluding volatile food and energy items, U.S. manufacturers and wholesalers saw a much more moderate 0.2 percent rise in prices.

Energy prices rose 4.1 percent, the biggest gain in six months, as gasoline prices climbed 10.2 percent, their largest increase since November. Food prices, however, slid 0.2 percent, the first drop since October.

"I think energy is going to dominate this story," said James Glassman, economist at JP Morgan in New York, adding that overall the U.S. inflation picture was stable and that a still-tight job market was unlikely to disturb that view.

"Labor costs are not a threat and why would they be if corporate profit margins are at record highs?" Glassman said.

Separate Labor Department data out on Thursday underscored the stability in the labor market even as the economy has sputtered over the last couple of quarters.

The department said the number of workers signing up for first-time jobless benefits last week was unchanged, holding at a range seen for the past several weeks.

"Jobless claims appear to be settling in around the 311,000 area, a level that has been historically consistent with fairly solid job creation," Bear Stearns economists wrote in a report after release of the data.

HOME MORTGAGE TROUBLES PERSIST

But trouble still loomed in the nation's housing and mortgage sector as the rate of home loans entering foreclosure hit a record during the first quarter.

The Mortgage Bankers Association, which tracked the foreclosures, said the rate of delinquencies was driven by mortgage troubles in seven states.

"Those states have special circumstances that do not reflect what is happening in the rest of the country," said MBA chief economist Douglas Duncan.

According to the industry trade group's latest report, one out of 200 loans is now entering the foreclosure process, a new record.

U.S. government debt prices eased, pushing yields higher, in choppy trade as investors showed some nervousness over the rise in producer prices and as they worked to extend a recent sell-off that has pushed benchmark yields to five-year highs.

Prices for U.S. stocks advanced as rising oil prices boosted shares of energy companies, including Exxon Mobil Corp. U.S. crude oil prices hit their highest level in 11 weeks.

The rise in yields on government debt helped lift the dollar to a 4-1/2-year high against the yen.

Traders were bracing for a government report on U.S. consumer prices on Friday that could determine whether bond yields extend a six-week climb.

Economists expect the overall Consumer Price Index to rise by 0.6 percent in May, but look for a modest 0.2 percent gain in the core index that strips out food and energy.

The producer price report suggested core inflation pressures were under control.

While overall producer prices rose 4.1 percent from a year ago, the biggest year-over-year increase since June 2006, core prices were up just 1.6 percent -- a moderate gain likely to offer some relief to Federal Reserve policy-makers as they seek to gauge inflation risks.

Rising gasoline prices have helped push headline inflation higher in recent months, but they have receded a bit over the past few weeks.