By Lucia Mutikani
WASHINGTON (Reuters) - Producer prices surged in February at their fastest pace in 1-1/2 years, pointing to a build-up in inflation pressures from soaring food and energy costs.
In another reminder on Wednesday of the headwinds facing the economy, the Commerce Department said groundbreaking activity for new homes posted the biggest drop in 27 years with permits for future building reaching a record low.
The reports came a day after the Federal Reserve said it expected the upward inflation pressure from commodities to prove transitory but that it was keeping a watchful eye.
"Many of these things do not have much bearing on the consumer price index... but they are certainly reason for the Fed's vigilance on commodity prices," said David Resler, chief economist at Nomura Securities International in New York.
U.S. stocks opened lower, weighed down by the data and the escalating nuclear emergency in Japan. Investors were still trying to come to grips with what impact the devastating earthquake and tsunami could have on the global economy.
Bond prices rose as traders saw the surge in prices and drop in housing starts as likely to impede the recovery, but the data had little impact on currencies.
The producer price index, which measures prices received by farms, factories and refineries, jumped 1.6 percent last month, the largest increase since June 2009, the Labor Department said. The gain was more than double economists' expectations.
In the 12 months to February, producer prices increased 5.6 percent, the biggest rise since March 2010.
Economists said given the lofty level of U.S. unemployment and lack of wage-driven price pressures, they did not expect the strong producer prices to pass through to consumers any time soon.
"Wages will be the thing to watch -- there won't be an inflationary spiral unless wage inflation picks up. But higher costs are both squeezing profit margins and consumer spending power," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
A report on Thursday is expected to show that the core Consumer Price Index increased just 0.1 percent in February, according to a Reuters survey, slowing from the prior month's 0.2 percent gain, which was the largest in more than a year.
HOUSING STUMBLES
The report on home building painted a bleak picture for a market lumbered by a vast backlog of unsold inventory.
Housing starts tumbled 22.5 percent last month to an annual rate of 479,000 units, just above a record low set in April 2009 and way below economists' expectations for 570,000 units.
Permits for future building hit 517,000 units, the lowest on records dating to 1960.
"It's not a good setup going into the spring construction season," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
A separate report showed applications for home loans dipped last week, suggesting still-stunted demand ahead of the spring selling season.
The increase in wholesale prices was broad-based.
Energy prices surged 3.3 percent -- the biggest advance since January 2010 and an increase that built on January's 1.8 percent rise. Gasoline prices rose 3.7 percent to account for more than 40 percent of the overall gain in energy costs.
Food prices jumped 3.9 percent, the biggest increase since 1974.
Stripping out volatile food and energy costs, core producer prices rose 0.2 percent last month, matching expectations and easing after a 0.5 percent rise in January.
The core PPI was lifted by a 1.0 percent increase in apparel, which was the biggest rise since 1990, while passenger cars rose 0.6 percent.
In the 12 months to February, the core producer price index rose 1.8 percent, the largest increase since August 2009.
(Reporting by Lucia Mutikani and Pedro da Costa; Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)