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Wholesale Inflation Hotter; Housing Slumps Further

The flagging U.S. economy got more mixed news from its troubled housing sector on Tuesday, while evidence of inflation pressures continued to lurk in the producer pipeline.

U.S. producer prices rose by 0.3 percent in February as expected, but a key measure of core inflation at the producer level climbed at the fastest pace in well over a year, the Labor Department said.

Soaring energy costs have buoyed producer prices and spilled into broader measures of consumer inflation in a worrying fashion for the Federal Reserve.

Nonetheless, analysts expect it will slash interest rates again at its meeting later on Tuesday, as policy-makers scramble to protect the economy from financial turmoil sparked by a slumping U.S. housing market. Interest rate futures markets have priced in a 100 basis point cut in the Fed's benchmark rate to 2 percent.

The number of housing starts declined 0.6 percent last month, the Commerce Department said. But this worked out to an annualized pace of 1.065 million units, which was higher than the 990,000 that had been forecast.

On the other hand, building permit activity, a sign of future construction plans, slipped 7.8 percent to an annualized pace of 978,000, the slowest rate since September 1991.

"Regarding the housing starts, I wouldn't put anything in that little bounce. The housing industry is in a recession," said Josh Stiles, bond strategist at IDEAGlobal in New York.

U.S. Treasury prices dipped and stock futures held higher earlier levels after the data, with investors keyed up for the announcement from the Fed, due after 2:15 p.m..

Core producer prices, which strip out volatile food and energy costs at the farm and factory gate, rose by 0.5 percent last month versus estimates for a 0.2 percent gain and after a 0.4 percent advance in January.

The Labor Department said higher prices for cars, light trucks, pharmaceutical products and alcohol had helped push up the core reading, which notched the largest advance since November 2006, when it gained 0.9 percent.

Headline producer prices, which jumped 1.0 percent in January, were dampened by a sharp 0.5 percent drop in food prices in February.

On a year-on-year basis, producer prices were up 6.4 percent while core 12-month PPI increased by 2.4 percent, which was the fastest pace since October 2007.

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