US consumer prices fell slightly more than expected in June to post their biggest drop in a year on weak fuel costs, but underlying inflation pressures remain elevated.
The Consumer Price Index fell 0.2 per cent, the Labor Department said today, the largest drop since June 2010, after rising 0.2 per cent in May. Economists had expected prices to fall 0.1 per cent.
But stripping out food and energy, core CPI rose 0.3 per cent after a similar gain in May and above economists' expectations for a 0.2 per cent increase.
"We are getting a very, very sharp rebound in core inflation and much more than the Fed had bargained for. We will be at price stability and possibly through it before the end of this year," said Eric Green, chief economist at TD Securities in New York.
Separate reports showed manufacturing is weak. Factory output was flat nationally in June while a gauge of manufacturing in New York state fell again in July.
"What a dilemma, slow growth and higher core inflation," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.
Industrial production rose in June for the first time in three months after revisions, on a jump in utilities and mining output, a Fed study showed. Manufacturing posted its weakest rise in the second quarter since the recession ended mid-2009, the Fed said.
The New York Federal Reserve said its "Empire State" general business conditions index was at minus 3.76 from minus 7.79 in June.
"It's still a disappointing sign that manufacturing sectors hit a bit of a stall but it's not
conclusive," David Resler, chief US economist for Nomura Securities, New York.
US stocks pared gains and the dollar edged higher against the euro after the consumer price data.
High inflation, driven by strong energy and food prices, undermined economic activity in first quarter, with growth slowing sharply to a 1.9 per cent annual rate after a brisk 3.1 per cent expansion in the final three months of 2010.
The economy is believed to have grown by between 1.5 per cent and 2.0 per cent in the second quarter.
Hopes of a stronger pick-up in growth during the July-September period have been dented somewhat by a weak labour market and retail sales in June.
But abating commodity inflation pressures as energy prices decline, should put more money in the pockets of consumers who have been stretching to cover rising costs for fuel and food.
