Producer prices surged in February at their fastest pace in just over 1-1/2 years, pointing to a build-up in pipeline inflation pressures from soaring food and energy costs.

The Labor Department said on Wednesday 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.

That was more than double economists' expectations for a 0.7 percent rise 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.

Economists said given the huge amount of slack in the economy, they did not expect the strong producer prices to pass through to consumers any time soon.

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.

The government is on Thursday expected to report limited pass through to consumers from the rising production costs.

The core Consumer Price Index is expected to have increased 0.1 percent in February, according to a Reuters survey, slowing from the prior month's 0.2 percent gain, which was the fastest pace in more than a year.

HOUSING CONSTRUCTION STUMBLES

A second report from the Commerce Department on Wednesday painted a bleak picture for the housing market, with housing starts tumbling 22.5 percent last month to an annual rate of 479,000 units, just above record low set in April 2009 and way below economists' expectations for a fall to 570,000 units.

The percentage decline was the largest in 27 years and permits, which give a hint of future construction, fell to a record low of 517,000 units.

It's not a good setup going into the spring construction season, said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

U.S. stock index futures pared gains on the data, while bond prices were little changed. The dollar held gains against the euro and was unchanged versus the yen.

The increase in wholesale prices last month was broad-based, with energy prices surging 3.3 percent -- the biggest increase since January 2010, after a 1.8 percent rise the prior month.

Gasoline prices, which rose 3.7 percent, accounted for over 40 percent of the increase in the energy index. 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 retreating from a 0.5 percent rise in January.

Last month, core PPI was lifted by 1.0 percent increase in apparel, which was the biggest rise since 1990, while passenger cars rose 0.6 percent, the Labor Department said.

In the 12 months to February, the core producer price index rose 1.8 percent, in line with expectations. It was the largest increase since August 2009 and followed a 1.6 percent increase in January.

(Reporting by Lucia Mutikani and Pedro da Costa, Additional reporting by Richard Leong and Karen Brettell in New York; Editing by Andrea Ricci)

Inflation