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US 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 edged higher.
"The reports paint a disappointing picture on the US 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 per cent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 per cent 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 per cent in December.
Economists had forecast the PPI declining only 0.4 per cent last month and gaining 0.3 per cent from a year ago.
US 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.
While the Federal Reserve, which has a 2 per cent 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 per cent last month after edging up 0.1 per cent in December.
US manufacturing output rose a modest 0.2 per cent in January and was flat in December, the Fed said in a separate report.
The Commerce Department said housing starts fell 2.0 per cent to a seasonally adjusted annual pace of 1.07 million units in January.
Most economists expect the US central bank to start raising interest rates in June, citing rapidly tightening labour market conditions. The Fed has kept its short-term interest rate near zero since December 2008.
The US economy still faces headwinds created by a stronger dollar and weaker overseas markets, which weigh on exporters.
Wholesale energy prices tumbled a record 10.3 per cent in January after sliding 6.2 per cent in December. It was the seventh straight month of declines.
Food prices fell 1.1 per cent, the largest decline since April 2013, after falling 0.1 per cent the prior month. The volatile trade services component, which mostly reflects profit margins, rose 0.5 per cent following a similar gain in December.
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 per cent.
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, Lennar Corp and Pulte Group are likely to benefit from the anticipated pick-up in starts this year.
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.
