Producer prices, exports increase
washington -- Rising energy costs drove up U.S. producer prices last month, and the trade deficit unexpectedly narrowed in June on stronger exports, according to reports Tuesday suggesting that the Federal Reserve will remain cautious about cutting interest rates.
The Fed in recent days has been pumping cash into credit markets roiled by fears over the spreading effect of sub-prime mortgage defaults. But inflation and a strengthening economy could complicate any Fed moves, analysts said.
Producer prices -- a measure of the prices paid at the farm and factory gate -- rose 0.6% in July, the Labor Department said. Economists polled by Reuters had forecast a rise of 0.2%.
“This report won’t alter the Fed’s concern about upside risks to inflation. But in light of the growing turmoil in credit markets, the risks to the economy are also piling up,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.
The Fed said last week that inflation remained its predominant concern, although it acknowledged that credit conditions had tightened for some households and businesses. The central bank showed concern over the fragile financial system by pumping billions of dollars of credit into the banking system in recent days.
Underlying data suggested that inflation, though still a concern, was in line with recent trends.
Stripping out food and energy costs, producer prices advanced 0.1%, even less than the 0.2% increase that economists had forecast.
The core inflation figure “is a good number and probably keeps the Fed happy with where they are now,” said Robert MacIntosh, chief economist with Eaton Vance Management in Boston.
But other analysts called the report a negative inflation surprise, saying it was not enough to keep the year-on-year core rate from rising to 2.3%.
“While it seems so far that higher commodity prices have not been spilling over to prices of other consumer goods, we remain convinced this development threatens a broader pickup in inflation,” said Harm Bandholz, economist at UniCredit Markets in New York.
A clearer picture will emerge today, when the Labor Department issues consumer price data for July.
The U.S. trade deficit narrowed in June as a weaker dollar and overseas growth boosted exports to a record. The June trade gap totaled $58.1 billion, down 1.7% from a downwardly revised May deficit of $59.2 billion, the Commerce Department said.
The June deficit was below the median forecast of $61 billion from Wall Street analysts polled by Reuters.
Overall goods and services exports rose 1.5% from May to a record $134.5 billion, led by a $1.2-billion increase in industrial supplies and materials and record exports of vehicles, auto parts and engines and of foods, feeds and beverages.
Rising U.S. exports are contributing to a narrowing of the trade gap on an annual basis and are helping to underpin domestic growth in the face of a steep housing downturn and credit market turmoil.
Some analysts said the data would result in an upward revision of U.S. gross domestic product growth for the second quarter, which was initially reported at a 3.4% pace.
