By Lucia Mutikani
WASHINGTON (Reuters) - U.S. producer prices recorded their biggest decline in more than five years in January on plunging energy costs, pointing to very benign inflation in the near term that could argue against raising interest rates.
Other reports on Wednesday suggested the economy was growing moderately early in the first quarter. Housing starts fell last month, while manufacturing output rebounded slightly. "The reports paint a disappointing picture on the U.S. recovery, with the housing starts report in particular reinforcing the narrative that the housing recovery might be in a spot of bother, said Millan Mulraine, deputy chief economist at TD Securities in New York.
The Labor Department said its producer price index for final demand fell 0.8 percent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 percent in December. It was the third straight month of decline in the PPI.
In the 12 months through January, producer prices were unchanged, the weakest year-on-year reading since records started in November 2010, after rising 1.1 percent in December.
Economists had forecast the PPI declining only 0.4 percent last month and gaining 0.3 percent from a year ago.
U.S. Treasury debt prices extended gains on the data. The dollar maintained gains versus a basket of currencies.
Lower energy prices, against the backdrop of softer global demand and increased shale production in the United States, and a strengthening dollar are dampening domestic inflation pressures.
"The weak PPI report adds further evidence of building disinflationary pressures in the U.S., not only in headline prices but also in core prices," said Mulraine.
While the Federal Reserve, which has a 2 percent inflation target, views the tame price environment as transitory, signs that the energy-driven weakness is leaking to core inflation could cause discomfort among some policymakers.
A key measure of underlying producer price pressures, which excludes food, energy and trade services, fell a record 0.3 percent last month after edging up 0.1 percent in December.
Most economists expect the U.S. central bank to start raising interest rates in June, citing rapidly tightening labor market conditions. The Fed has kept its short-term interest rate near zero since December 2008.
Wholesale energy prices tumbled a record 10.3 percent in January after sliding 6.2 percent in December. It was the seventh straight month of declines.
Food prices fell 1.1 percent, the largest decline since April 2013, after falling 0.1 percent the prior month. The volatile trade services component, which mostly reflects profit margins, rose 0.5 percent following a similar gain in December.
In a separate report the Commerce Department said housing starts fell 2.0 percent to a seasonally adjusted annual pace of 1.07 million units in January.
Despite the decline, which was driven by a fall in groundbreaking for single-family projects, starts remained above the one million-unit mark for a fifth straight month. Compared to January last year, groundbreaking was up 18.7 percent.
Sluggish wage growth and a shortage of homes on the market stymied housing last year, even as the broader economy was accelerating.
But a turnaround in housing is expected this year as a rapidly tightening labor market pushes up wages and encourages more young adults to move out of their parents' basements and set up their own homes.
Already in the fourth quarter, household formation was accelerating, breaking above the one-million mark that usually is associated with a fairly healthy housing market. Although much of the gain in households went into rentals, that would still be a boost to housing starts this year.
Homebuilders such as DR Horton
In January, permits for future home construction dipped 0.7 percent to a 1.05 million-unit pace. Permits have been above a 1 million-unit pace since July.
Single-family permits fell 3.1 percent last month, while multi-family permits rebounded 3.6 percent.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
