Producer Inflation Firms; Factory Activity Picks Up

By Lucia Mutikani

WASHINGTON -- U.S. producer prices rose more than expected in June as the cost of gasoline and a range of other goods rose, indicating the recent oil-driven downward spiral in prices was abating.

Other data Wednesday showed a rebound in factory activity in New York state this month. The signs of stabilizing manufacturing and firming inflation came as Federal Reserve Chair Janet Yellen said the U.S. central bank remained on track to raise interest rates this year.

The Labor Department said its producer price index for final demand increased 0.4 percent last month after increasing 0.5 percent in May. It was the second straight month of increase in producer prices.

A 0.7 percent increase in goods prices accounted for nearly two-thirds of the increase in the PPI last month. In the 12 months through June, the PPI fell 0.7 percent after declining 1.1 percent in May. It was the fifth straight 12-month decrease in the index.

%VIRTUAL-pullquote-If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate.%Economists polled by Reuters had forecast the PPI rising 0.2 percent last month and falling 0.9 percent from a year ago.

In testimony prepared for the U.S. House of Representatives Financial Services Committee, Yellen affirmed the view of a central bank prepared to gradually raise rates after more than six years at a near-zero level.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate," Yellen said.

The dollar rose against the euro, while prices for U.S. Treasury debt fell.

A plunge in crude oil prices and a resurgent dollar have subdued producer inflation and dampened overall domestic price pressures. Inflation is stabilizing as oil prices steadily rise, but a strong dollar suggests any increase will be gradual.

A report Tuesday showed broad weakness in import prices in June, underscoring the impact of the dollar's 11.6 percent appreciation against the currencies of the United States' main trading partners since June 2014.

In a separate report, the New York Fed said its Empire State general business conditions index rose to 3.86 in July from -1.98 in June, which was its lowest level since January 2013.

A reading above zero indicates expansion. Manufacturing has been hammered by the strong dollar and investment spending cuts in the energy sector in response to the tumble in oil prices. There are signs, however, that the spending cuts in the energy sector are diminishing as oil prices rise.

The New York Fed survey's index on future business conditions climbed to 27.04 from June's 25.84, which was the weakest since February. A measure of new orders, however, contracted for a second month.

Last month, gasoline prices increased 4.3 percent after surging 17 percent in May. Food prices rose 0.6 percent in June following a 0.8 percent increase the prior month.

A shortage of eggs after an outbreak of bird flu, which led to the culling of millions of chickens, continues to pressure food prices. Wholesale egg prices soared a record 84.5 percent last month after surging 56.4 percent in May.

Higher gasoline and food prices are likely to filter through to the June consumer price index. June consumer price data will be published Friday.

The volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, rose 0.2 percent in June after increasing 0.6 percent in the prior month.

A key measure of underlying producer price pressures that excludes food, energy and trade services increased 0.3 percent last month after slipping 0.1 percent in May. The so-called core PPI was up 0.7 percent in the 12 months through June.

-Richard Leong contributed reporting from New York.