WASHINGTON Producer prices in August rose by the most in three years as energy costs surged, but fairly benign underlying inflation pressures should help the Federal Reserve maintain its accommodative monetary policy stance.
Other data on Thursday underscored the weakness in the labor market, a major concern for the U.S. central bank, with the number of Americans filing new claims for state unemployment benefits touching a two-month high, although some of the gain was attributed to Tropical Storm Isaac.
The Fed launched another aggressive stimulus program, saying it would buy $40 billion of mortgage-backed debt a month until the outlook for jobs improves substantially as long as inflation remained contained.
In addition, policymakers said they would not likely raise rates from current rock-bottom lows until at least mid-2015.
Economists said the strong rise in wholesale inflation last month was unlikely to translate into a sustained increase in prices at the supermarket and shopping mall, which would be troubling for the Fed.
"There is little indication that it's going to pass through to higher consumer inflation," said Gus Faucher, a senior economist at PNC Financial Services Group in Pittsburgh. "We continue to have economic growth that is modest."
The Labor Department said its seasonally adjusted producer price index increased 1.7 percent last month, the largest gain since June 2009, after rising 0.3 percent in July.
The increase in prices received by farms, factories and refineries overshot economists' expectations for a 1.1 percent advance. Energy prices, which surged by the most in three years, accounted for more than 80 percent of the rise in wholesale inflation.
A second report from the department showed initial claims for state unemployment benefits rose 15,000 to a seasonally adjusted 382,000 last week, exceeding expectations for an increase to 370,000.
The department said Tropical Storm Isaac, which drenched parts of the country, accounted for about 9,000 of the first-time claims filed last week. The number is not adjusted to take normal seasonal patterns into consideration.
The Fed's decision sparked a rally on Wall Street, where the Standard & Poor's 500 index closed at its highest level since December 2007. Prices for shorter-dated U.S. Treasury debt rose, but prices for the 30-year bond fell.
The dollar fell broadly, hitting a seven-month low against the yen and a four-month trough versus the euro.
SLUGGISH LABOR MARKET
Even accounting for the storm, the claims report suggested little improvement in the labor market after job growth slowed sharply in August. The four-week moving average for new claims, a better measure of labor market trends, climbed 3,250 to 375,000, the highest since the middle of July.
Employers added just 96,000 jobs last month, a step down from July's 141,000 count. While the unemployment rate dropped to 8.1 percent in August from 8.3 percent, it was because many Americans gave up the search for work.
The sluggish labor market, which is restraining domestic demand, suggests any rise in consumer prices stemming from the spike in producer inflation last month could be temporary, although it will put a squeeze on U.S. households.
"This report does not bode well for households who are dealing with inflation-adjusted incomes that are going nowhere," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.
The department will release its consumer price index on Friday. Consumer prices are forecast to have increased 0.5 percent last month after being flat in July, according to a Reuters survey.
On a year-on-year basis, they are seen up 1.7 percent, below the Fed's 2 percent target but an acceleration from 1.4 percent in July. At the wholesale level, energy prices jumped 6.4 percent last month, with gasoline costs surging 13.6 percent.
Food prices rose 0.9 percent, the largest gain since November. Prices for dairy products, which rose by the most since June last year, accounted for a third of the increase in food prices last month.
Food prices had increased 0.5 percent the prior month and could remain elevated as a severe drought pushes up the cost of grain and soybeans.
"Unfortunately, this is only the beginning of the drought impacts," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
(Editing by James Dalgleish)