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Services, motor vehicles lift US 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 pickup 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.

Tariffs imposed by the Trump administration on imports of lumber, steel and aluminum 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."

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The producer price index 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 labor 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. US financial markets were little moved by the data.

HEALTHCARE COSTS RISE

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 one 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.

There were also increases in the cost of transporting goods by road, likely reflecting an acute shortage of truck drivers. Truck transportation prices soared a record 1.3 per cent in June.

But wholesale prices of apparel and footwear fell as did the cost of airline tickets.

Prices for goods edged up 0.1 per cent last month after surging one per cent in May. They were last month restrained by a 1.1 per cent drop in food prices, which followed a 0.1 per cent gain. Wholesale gasoline prices rose 0.5 per cent after jumping 9.8 per cent in May.

Excluding foods and energy, goods prices climbed 0.3 per cent, rising by the same margin for a sixth consecutive month. Motor vehicle prices increased 0.4 per cent in June, the biggest gain in seven months.

In a separate report on Wednesday, the Commerce Department said wholesale inventories increased 0.6 per cent instead of the 0.5 per cent gain it reported last month.

Stocks at wholesalers edged up 0.1 per cent in April. They rose 5.9 per cent year-on-year in May.

The component of wholesale inventories that goes into the calculation of gross domestic product - wholesale stocks excluding autos - increased 0.8 per cent in May.

Inventory investment was neutral to GDP growth in the first quarter. The economy grew at a 2 per cent annualised pace during the January-March period.

Sales at wholesalers accelerated 2.5 per cent in May, the biggest increase since March 2011, after rising 1.4 per cent in April. At May's sales pace it would take wholesalers 1.24 months to clear shelves, the lowest since November 2014, down from 1.27 months in April.

REUTERS