WASHINGTON (Reuters) - Soaring energy costs pushed U.S. producer prices up sharply last month and housing starts fell to 17-year low, according to data on Tuesday that spotlighted the dilemma the Federal Reserve’s faces in trying to tackle weak economic growth amid high inflation.
Producer prices rose by a larger-than-expected 1.4 percent in May as energy prices leaped 4.9 percent, but core inflation at the producer level slowed as forecast, as car prices sank, a Labor Department report showed.
The U.S. dollar slipped on the tame core inflation data and speculation the Federal Reserve will be in no hurry to raise interest rates while economic growth remains fragile.
Similar thinking helped U.S. government bond yields to fall, while Wall Street stocks slipped on worry over bank earnings.
“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 had expected the Producer Price Index, a gauge of prices paid at the farm and factory gate, would rise 1.0 percent after increasing 0.2 percent in April.
Over the 12 months through May, producer prices have risen 7.2 percent, marking the eighth consecutive month in which prices rose more than 6.0 percent on a year-on-year basis, the longest stretch since the stagflationary period that ended in 1982, a Labor department official said.
“There is nothing here to breed complacency at the Fed or for that matter (investors’) risk appetite,” said Alan Ruskin, chief international strategist, at RBS Global Banking and Markets in Greenwich, Connecticut.
“There is a strong argument that either producers find some pricing power and hike prices which forces Fed action, or they have little pricing power and take the hit on profit margins.”
The U.S. central bank has cut its key interest rate 3.25 percentage points to 2.0 percent since mid-September to shield the economy from a collapsing housing market.
It has signaled it will now go on hold while it watches economic growth and inflation, and expects price pressures to ease in the months ahead.
Core producer prices excluding energy and food increased by 0.2 percent, as expected, slowing from a 0.4 percent gain in April. Core prices were up 3 percent from a year ago, matching the April gain as the biggest increase since 1991.
Signaling pressures at an earlier stage in the production process, “core intermediate” goods prices rose 2.0 percent last month for the largest rise since January 1980. This included a record 10.7 percent increase in steel mill product prices.
Gasoline prices at the producer level rose 9.3 percent in May to stand 26.3 percent above their year-earlier level.
“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.
U.S. crude oil was trading at nearly $134 per barrel on Tuesday.
Separately, the Commerce Department said U.S. housing starts fell 3.3 percent in May to a 975,000-unit annual pace, the lowest since March 1991, while permits for future building slipped 1.3 percent. Economists warned that home building could decline by another 15 percent in the coming months.
The Fed is counting on its aggressive interest rate cuts earlier this year to prevent a lasting economic slump, but it is keeping a wary eye on inflation, which it hopes will slow provided the cost of crude oil does not keep marching higher.
Federal Reserve data showed industrial production unexpectedly slipped 0.2 percent in May after a weather-related drop in output by utilities. With output falling, the amount of industrial capacity in use slipped to 79.4 percent, the lowest since September 2005 and an indication of economic softness.
“The weak dollar and tax rebates are not supporting production. As global growth slows and the tax rebates get spent, the growth outlook is likely to sag,” said T.J. Marta, fixed income strategist, at RBC Capital Markets.
Another Commerce Department report showed the U.S. current account deficit, the broadest measure of its international trade, widened more than expect to $176.4 billion in the first quarter from $167.2 billion in the fourth quarter.
The current account deficit equaled 5.0 percent of U.S. gross domestic product, up from 4.8 percent in the fourth quarter.
(Additional reporting by Patrick Rucker, Joanne Morrison and Mark Felsenthal in Washington and Ellen Freilich and Kristina Cooke in New York)
Reporting by Alister Bull, Editing by Tom Hals