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Services, motor vehicles lift producer prices in June

Washington

US producer prices increased slightly more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years.

The report published by the Labor Department on Wednesday also showed a pick-up in underlying producer inflation last month.

The data supports views of steadily rising price pressures, which will probably allow the Federal Reserve to increase interest rates two more times this year.

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Tariffs imposed by the Trump administration on imports of lumber, steel and aluminium pushed up prices last month.

"Tariffs are negative for economic growth but they are also inflationary," said John Ryding, chief economist at RDQ Economics in New York. "We expect these price pressures will flow through into higher core inflation at the consumer level as the year unfolds."

The producer price index (PPI) for final demand climbed 0.3 per cent last month after rising 0.5 per cent in May. In the 12 months through June, the PPI advanced 3.4 per cent, the largest gain since November 2011. Producer prices increased 3.1 per cent year-on-year in May.

Economists polled by Reuters had forecast the PPI gaining 0.2 per cent in June and rising 3.2 per cent year-on-year. A key gauge of underlying producer price pressures that excludes food, energy and trade services rose 0.3 per cent last month. The so-called core PPI edged up 0.1 per cent in May.

In the 12 months through June, the core PPI advanced 2.7 per cent after increasing 2.6 per cent in May. Manufacturers have been facing a rise in the cost of inputs, but so far have not passed on most of the increases to consumers.

Inflation is gradually rising against the backdrop of a labour market that is viewed as being near or at full employment.

The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, hit the US central bank's 2 per cent target in May for the first time in six years.

The Fed raised interest rates in June for the second time this year and has forecast two more rate hikes by the end of 2018.

In June, the cost of services increased 0.4 per cent after climbing 0.3 per cent in May. A 21.8 per cent jump in the index for fuels and lubricants retailing accounted for about 40 per cent of the rise in the cost of services last month.

The cost of healthcare services rose 0.2 per cent as a 1.0 per cent surge in prices for hospital outpatient care offset slight declines in the cost of doctor visits and hospital inpatient care. Healthcare prices nudged up 0.1 per cent in May. Those healthcare costs feed into the core PCE price index. REUTERS