U.S. industrial output barely rose last month and wholesale inflation was tame, suggesting the economy's recovery from a severe recession was losing some steam as government stimulus faded.

The reports painted a picture of a sluggish recovery from recession with ample slack to cool inflation. They were likely to reinforce the U.S. Federal Reserve's commitment to keep interest rates near zero for an extended period.

We are looking at a tepid recovery. The economy is still very dependent on government stimulus, including monetary stimulus, said Chris Low, chief economist at FTN Financial in New York.

Industrial output edged up 0.1 percent in October after a 0.6 percent advance the prior month, the Federal Reserve said, as auto manufacturers scaled back following the end of the popular cash for clunkers incentive in August.

The rise was well below economists' expectations for a 0.4 percent gain, but marked the fourth straight monthly gain.

In another report, the U.S. Labor Department said its producer price index, a gauge of prices received by farms, factories and refineries, rose 0.3 percent last month, below expectations for a 0.5 percent gain, after a 0.6 percent fall in September.

Core producer prices, which exclude food and energy costs, unexpectedly dropped 0.6 percent. It was the largest decline since July 2006, after slipping 0.1 percent in September.

U.S. stocks marched to fresh 13-month highs despite the below forecast industrial output data and tepid outlooks from home improvement chain Home Depot Inc and discount retailer Target Corp . Stocks were lifted by broker views on improving prospects for two Dow components. <.N>

Treasury Secretary Timothy Geithner told a Senate Foreign Relations Committee hearing the economy was likely to grow at a more moderate rate than in past recoveries as households worked to reduce their debts.

October's benign inflation data showed rising commodity prices were pushing up raw material costs, but that was not flowing through to the finished goods that are sold to consumers, said Jeff Kleintop, chief market strategist at LPL Financial in Boston.

Those prices remain tame, with the abundance of global labor and factory capacity acting as a shock absorber to those higher raw material prices, he said. That gives the Fed some breathing room to allow them to wait to raise rates until sometime maybe in the middle of next year.

EXCESS ECONOMIC SLACK

High unemployment and untapped industrial capacity after the worst U.S. recession in 70 years have suppressed prices, but some fear massive efforts by the government and the Fed to restore growth could ignite inflation.

These fears have been heightened by the U.S. dollar's 15 percent depreciation against a basket of currencies since mid-March.

Fed Chairman Ben Bernanke said on Monday the central bank was monitoring the U.S. dollar's fall, but economic slack and tame inflation expectations should keep price rises in check.

Over the past year, core producer prices have risen 0.7 percent, the smallest gain since the 12 months that ended in March 2004. Financial markets had forecast a 1.4 percent rise.

In October, the core index was held back by a large drop in light truck prices and a fall in the cost of new cars, related to the pricing of new 2010 models.

The Labor Department reports on U.S. consumer prices on Wednesday. Economists expect the consumer price index to rise a modest 0.2 percent, with the core rate up just 0.1 percent.

The Fed's report on industrial output underscored the level of inflation-cooling slack in the economy. Capacity utilization inched up 0.2 percentage points to 70.7 percent, a rate 10.2 points below its 1972-2008 average.

Some economists were unfazed by the slowdown in industrial production last month, which came as assemblies of light motor vehicles edged down.

We consider this to be a minor setback after three months of huge gains. It by no means signals that the inventory-led bounce in production has run its course. Production is still on track for a healthy gain in fourth quarter, said Steven Wieting an economist at Citigroup in New York.

The dollar's decline has raised concerns that investors were shunning U.S. assets, which would make it harder for the Treasury Department to finance its growing debt burden.

Treasury figures on Tuesday, however, showed that the two biggest foreign debt buyers, China and Japan, had increased their holdings in September.

Separately, sentiment among U.S. home builders was steady this month, according to a survey taken before the government extended a popular tax credit for first-time buyers.

(Additional reporting by Chuck Mikolajczak in New York; Editing by Kenneth Barry)

Ben Bernanke Timothy geithner Inflation