WASHINGTON (Reuters) — US producer prices rose sharply in February and new claims for jobless aid fell last week, data showed yesterday, but sluggish factory activity in the Northeast suggested the economy was only limping along.The Labour Department said the Producer Price Index, a gauge of prices received by farms, factories and refineries, rose 1.3 percent last month as energy costs climbed 3.5 percent and food prices moved up 1.9 percent.

Excluding volatile food and energy costs, the so-called core index advanced 0.4 percent, reflecting steep increases in tobacco and light truck prices.

Prices for government bonds fell and stocks were initially weaker as the producer price data was seen lowering chances of a Federal Reserve interest rate cut. However, stock indices later turned up as financial shares recovered from recent losses, while bond prices were mostly flat.

Two soft reports on March factory activity helped dispel inflation concerns by offering a reminder that the economy was moving forward slowly.

The Philadelphia Federal Reserve Bank said its business activity index, which covers the mid-Atlantic region, dipped to 0.2 percent from 0.6 in February. Separately, the New York Fed said its gauge of New York state factory activity fell to its lowest level since May 2005.

“Generally the numbers are consistent with an economy that is growing slowly, below trend, but still has stubborn inflation issues,” said Peter Kretzmer, senior economist at Banc of America in New York.

While manufacturing continues to exhibit weakness, the data on initial claims for unemployment insurance benefits issued by the Labour Department suggested the labour market remains relatively firm.

First-time claims fell by a larger than expected 12,000 to 318,000 last week. A more reliable four-week moving average of initial claims dropped by 10,250 to 329,250.

Still, the number of workers remaining on unemployment benefits rose by 48,000 to 2.576 million for the week ended March 3, the most recent week these data were available.

Economists said the big producer price gains and evident health of the job market would likely keep alive concerns at the Fed that inflation might not recede as hoped.

“This would signal that there are inflationary issues, which would certainly mean that the Fed is not ready to lower interest rates,” said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

Fed officials are widely expected to hold benchmark overnight borrowing costs steady when they meet on Tuesday and Wednesday, but financial markets think the central bank could lower interest rates by mid-year.

The producer price numbers came a day before the Labor Department was set to release its closely watched Consumer Price Index for February, which the Fed will examine closely to see if its forecast of slowing inflation on is on track.

The February rise in energy prices at the producer level followed a 4.6 percent drop the prior month. Food prices were up 1.9 percent last month after a 1.1 percent gain in January.

Overall producer prices were up 2.5 percent from the same time a year ago. But core prices were up a more moderate 1.8 percent over the past 12 months, likely easing at least some of the Fed’s concerns as they try to manage inflation and keep the economy on a long-term growth path.