Producer Prices Jumps 1.3%, Keeping Inflation In Focus

Higher energy costs pushed producer prices up by a bigger-than-expected 1.3% in February and there was a large drop in the number of initial jobless claims filed last week, Labor Department data on Thursday showed.

Adding to a mixed picture as the economy inches ahead, separate data from the New York and the Philadelphia Federal Reserves showed manufacturing activity in the New York and Middle Atlantic regions weakened notablely.

The increase in producer prices followed a 0.6% decrease in January, and was well above the 0.5% gain analysts polled by Reuters ahead of the report were expecting.

Excluding volatile food and energy prices, the so-called core Producer Price Index advanced 0.4%, still somewhat more than the 0.2% gain economists were expecting. A 4.1% surge in tobacco prices helped push up core prices.

Separate Labor Department data showed that first-time jobless claims fell by a larger than expected 12,000 to a seasonally adjusted 318,000. Analysts polled ahead of the report were expecting claims to increase slightly.

The more reliable four-week moving average of initial claims dropped by 10,250 to 329,250.

Still, the number of workers remaining on unemployment benefits rose by 48,000 to 2.576 million, for the week ended March 3, the most recent week these data were available. That was close to the 2.54 million continued claims analysts were expecting.

PPI Sparks Inflation Fears

The bigger-than-expected gain in the PPI spurred inflation worries ahead of next week's Federal Reserve policy meeting. But readings on the inflation picture were mixed among economists.

"These numbers are not going to change much the view that inflation is somewhat tame, or slowing, and that the Fed will need to cut rates later in the year," said Mark Meadows, currency analyst at Tempus Consulting.

Others saw some signs of price pressures, making it less likely the central bank would be able to cut its benchmark fed funds rate any time soon.

"This would signal that there are inflationary issues, which would certainly mean that the Fed is not ready to lower interest rates," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

Energy prices advanced by 3.5% in February after falling 4.6% the prior month, the report showed. Food prices were up 1.9% after a 1.1% gain in January.

Overall prices in the index were up 2.5% from the same time a year ago. But core prices were up a more moderate 1.8% from a year ago, likely giving some relief to Fed officials as they manage inflation while trying to help the economy grow at a sustainable pace.

The producer price numbers came a day before the Labor Department was set to release its closely watched Consumer Price Index. Economists are expecting to see moderate gains in consumer prices during February.

New York Manufacturing Slumps

Separate data on Thursday from the New York Federal Reserve and Philadephia Federal Reserved showed a surprisingly big decline in manufacturing activity in March.

The New York Fed's "Empire State" general business conditions index fell to its lowest reading since May 2005, pulled down by a sharp decrease in new orders. This report adds to evidence that business spending is slackening this year, as the economy is expected to limp along at a tepid pace.

Meanwhile, the "Philly Fed" index remained stuck in neutral for a second month in a row, defying expectations for a rebound.

The Philadelphia Federal Reserve's business activity index dipped to 0.2 this month from 0.6 in February, below forecasts of a rise to 4.0.

Employment conditions were slightly better while higher energy costs helped push up prices paid. New orders improved modestly.

Separate government data showed that net U.S. capital flows turned positive in January with $74.4 billion of net inflows after a $14.7 net outflow in December. This rebound was driven by $84 billion of net foreign purchases of long-term securities, including swaps, after $1.2 billion inflows in December. Excluding swaps, international investors bought a net $97.4 billion in long-term securities.