Rise in Producer Prices Could Bolster Fed's Tapering

producer price index food energy costs federal reserve taper
Alan Diaz/AP
By Jason Lange

U.S. producer prices rose more than expected in June, pointing to an apparent increase in inflationary pressures that could make the U.S. Federal Reserve more comfortable about reducing its monetary stimulus.

The Labor Department said Friday its seasonally adjusted producer price index increased 0.8 percent last month, the largest gain since September.

A Reuters survey of economists had forecast prices received by the nation's farms, factories and refineries rising 0.5 percent last month.

While federal budget cuts and higher taxes appeared to slow U.S. economic growth sharply in the April-June period, the pace of hiring has held at relatively robust levels and most economists expect growth will rebound later in the year.
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The data sends a reassuring signal that demand is still strong enough to push prices higher.

While much of the increase was fueled by a jump in gasoline prices, which could weigh on consumers, a gauge of underlying inflation pressures pointed to a little more vigor in the economy.

So-called core producer prices, which strip out volatile energy and food costs, rose 0.2 percent last month, boosted by a 0.8 percent increase in the price of passenger cars. Economists had expected core prices to rise 0.1 percent.

Core prices at the wholesale level rose 1.7 percent in the 12 months through June, matching the gain in the previous month. Economists had expected a weaker 12-month rise. Firmer core inflation could be good news for the economy as it may signal firming consumer demand.

That in turn could make policymakers at the Fed more confident about recent assertions that the economy was strengthening quickly enough for the U.S. central bank to begin reducing its bond-buying stimulus program by the end of the year.

"If there is a time we want to see higher inflation, this is one of them," said Carl Tannenbaum, chief economist at Northern Trust in Chicago.

Inflation has drifted worrisomely low in recent months, and some Fed policymakers argue the bond-buying program should continue at full steam until inflation firms.

S&P 500 stock index futures turned slightly lower after the data, while U.S. Treasuries prices pared gains. The dollar extended gains against the yen.

Additional reporting by Richard Leong

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