Higher energy costs boosted producer prices 0.9 percent in May, but excluding volatile food and energy costs, prices paid at the factory gate were up a more moderate 0.2 percent, the Labor Department reported on Thursday.

Separate data out on Thursday showed no change in the number of workers signing up for first-time jobless benefits last week, underscoring stability in the labor market.

Economists polled ahead of the data were expecting producer prices -- the prices paid by manufacturers and wholesalers -- to rise 0.6 percent and by 0.2 percent when energy and food were stripped out.

Overall producer prices, which are a measure of prices before they reach the consumer, rose 4.1 percent from a year ago, the biggest year-over-year increase since June 2006. However, core producer prices were up just 1.6 percent from a year ago, and that moderate gain will likely add some relief to Federal Reserve policy-makers as they balance the risks of inflation against economic growth.

Energy prices were up 4.1 percent in May, the biggest monthly rise in six months. That monthly gain was partly due to a 10.2 percent rise in gasoline prices, also the biggest monthly increase since last November.

U.S. government bond prices extended losses on Thursday after the latest PPI data increased investors' worries about the slight chance of a Federal Reserve interest rate increase by year end.

The dollar edged up to session highs against the euro and yen, and U.S. stock futures cut gains.

Economists did not put too much stock into the wholesale inflation report as they await for the government's take on consumer prices on Friday.

The headline number was bigger than expected, but that will be watered down in some sense because we know what gas has done, said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

JOBLESS CLAIMS UNCHANGED

Meanwhile, the number of workers signing up for first-time unemployment benefits was unchanged last week at a seasonally adjusted 311,000, the Labor Department reported on Thursday.

Economists polled ahead of that report were expecting jobless claims to inch up to 312,000 in the week ended June 9, after a previously reported 309,000 claims the prior week.

The four-week moving average, a less volatile measure of employment conditions, edged up to 311,250 from 307,500.

The number of workers continuing on benefits fell by 43,000 to 2.49 million for the week ended June 2, the most recent week these figures were available. Economists were expecting to see 2.51 million continued claims.

Energy Inflation Unemployment