Producer prices rose by 1.6 percent in February, as energy and consumer goods saw a strong increase, suggesting building inflationary pressures in the economy.

HOUSING STARTS:

U.S. housing starts posted their biggest decline in 27 years in February while building permits dropped to their lowest level on record, suggesting the beleaguered real estate sector has yet to rebound from its deepest slump in modern history.

KEY POINTS: * The Labor Department said its seasonally adjusted index for prices paid at the farm and factory gate jumped 1.6 percent, the largest increase since June 2009 after rising 0.8 percent in January. * Economists polled by Reuters had expected producer prices to rise 0.7 percent last month. In the 12 months to February, producer prices increased 5.6 percent, the biggest rise since March, after advancing 3.6 percent in January. * The report came a day after the Federal Reserve said it expected the upward inflation pressure from energy and other commodities to prove transitory but that it would keep a close eye on inflation and inflation expectations. * Groundbreaking on new construction dropped 22.5 percent last month to an annual rate of 479,000 units, according to Commerce Department data released on Wednesday. This was just above a record low set in April 2009 and way below the estimates of economists, who had been looking for a smaller drop to 570,000. * January's figure was revised up to 618,000 units from 596,000. But that did not change the tenor of the report, which confirmed that the sector is failing to recover despite interest rates near record lows.

COMMENTS:

SCOTT BROWN, CHIEF ECONOMIST, RAYMOND JAMES, ST. PETERSBURG,

FLORIDA

You are seeing a lot of headline pressure from energy prices, but there is limited pass-through within the distribution system. About 60 percent of consumer prices are service related. Still there are questions whether higher energy prices will appear on the consumer level.

HOUSING STARTS: I wouldn't read too much into it since it's February, but the headline number is disappointing. It's not a good setup going into the spring construction season.

DAVID RESLER, CHIEF ECONOMIST, NOMURA SECURITIES INTERNATIONAL,

NEW YORK

PPI jumps around an awful lot. Many of these things do not have much bearing on the CPI, because the weights are so much different and the CPI has a more significant service sector component. So these aren't going to feed directly into the CPI but they are certainly reason for the Fed's vigilance on commodity prices.

Its really, really disappointing that the housing sector isn't getting any traction. I think with so much uncertainty about the outlook for housing, homebuilders aren't likely to put up new houses. There's still a great deal of uncertainty about where prices are heading, until builders can be confident they can recoup their construction costs they are probably going to be reluctant to start houses.

VIMOMBI NSHOM, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON

REUTERS:

February housing permits sank to a record low of 517,000 authorizations (at an annualized rate) on data available since 1960. Permits fell 8.2 percent from January and are 20.5 percent lower than issuances in February 2009. Every region experienced lower activity, led by the 27.8 percent fall in single-family permits from the Northeast (the second substantial month of decline) leading to the region's lowest number of permits --57k-- in history. Starts also fell in February, and by a larger magnitude (22.5 percent) to an annualized rate of 479,000 homes started, sinking from the 618,000 construction pace seen in January. Every region was affected, primarily the Midwest whose rate of 57k units started is a record low, reflecting a drop of nearly 50 percent. Starts are also down a little over 20 percent from last year.

DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON

REUTERS:

While special factors may be playing a role (particularly for food prices in February) there are signs of rising price pressures across the board in this PPI data breakdown, with even the relatively moderate core finished data participating.

MARKET REACTION: STOCKS: U.S. stock index futures pared gains BONDS: U.S. bond prices were little changed FOREX: The dollar held gains against the euro, unchanged vs the yen

Inflation Energy