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Expensive petrol raises producer prices in May

Data strengthens expectations that inflation will likely breach Fed's 2% target

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Producer price index for final demand rose 0.5% last month, boosted by a 9.8% jump in petrol prices.

Washington

US producer prices increased more than expected in May, leading to the biggest annual gain in nearly 61/2 years, but underlying producer inflation remained moderate.

The Labor Department said on Wednesday its producer price index for final demand rose 0.5 per cent last month, boosted by a surge in petrol prices and continued gains in the cost of services. The PPI edged up 0.1 per cent in April.

In the 12 months through May, the PPI increased 3.1 per cent, the largest advance since January 2012. Producer prices rose 2.6 per cent year-on-year in April. Economists polled by Reuters had forecast the PPI gaining 0.3 per cent from the prior month and rising 2.8 per cent from a year ago.

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A key gauge of underlying producer price pressures that excludes food, energy and trade services nudged up 0.1 per cent last month. The so-called core PPI rose by the same margin in April. In the 12 months through May, the core PPI rose 2.6 per cent after advancing 2.5 per cent in April.

The dollar pared losses against a basket of currencies after the data while US Treasury yields rose. US stock index futures were trading higher.

Federal Reserve officials were due to resume their two-day policy meeting and are expected to raise interest rates for a second time this year later on Thursday, encouraged by steadily rising inflation and a rapidly tightening labour market.

The renewed upward trend in producer prices strengthens expectations that inflation will pick up this year and likely breach the US central bank's 2 per cent target.

Regional factory surveys have shown an acceleration in raw material prices this year. So far, manufacturers have not passed on these higher costs to consumers. A report on Tuesday showed monthly consumer prices rising moderately in May.

The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 1.8 per cent year-on-year in April after a similar gain in March.

In May, prices for goods surged 1.0 per cent, accounting for 60 per cent of the rise in the PPI. Goods prices were unchanged in April. In May, they were boosted by a 9.8 per cent jump in the price of petrol. Wholesale petrol prices slipped 0.4 per cent in April.

Prices for steel mill products surged 4.3 per cent in May, the largest rise since February 2011, likely reflecting steel import tariffs imposed in March by the Trump administration. The cost of these products could rise further after the government this month widened the duties to steel imports from the European Union, Canada and Mexico.

Wholesale food prices edged up 0.1 per cent last month after declining 1.1 per cent in April. Excluding foods and energy, goods prices increased 0.3 per cent, rising by the same margin for a third straight month.

The cost of services increased 0.3 per cent after nudging up 0.1 per cent in April. Services were driven by a 0.9 per cent rise in margins for trade services.

The cost of healthcare services ticked up 0.1 per cent after falling 0.2 per cent in April. Those costs feed into the core PCE price index. REUTERS