UPDATE 1-Traders price in higher inflation after June PPI

(Updates market activity, adds background)

NEW YORK, July 14 (Reuters) - A gauge of traders' inflation expectations grew in early morning trading on Tuesday after government data showed U.S. producer prices rose more than expected in June.

The gap, or breakevens, between the yields on benchmark U.S. 10-year government notes and 10-year Treasury Inflation Protected Securities (TIPS), expanded to 1.59 percent. This compares with 1.51 percent late on Monday.

The 10-year TIPS breakevens is well within the Federal Reserve's perceived comfort 1.0 percent to 2.0 percent range for annual inflation.

U.S. producer prices shot up 1.8 percent last month, twice the level predicted by economists. Much of the increase was due higher energy costs, the government said. For more see [ID:nOAT002200]

Crude prices CLc1 spiked above $70 a barrel in June, but tumbled below $60 to a two-month low on Monday on worries over weak energy demand if global economic weakness persists. [O/R]

TIPS have lagged regular Treasuries in recent weeks as oil prices have retreated and evidence suggesting inflation will stay tame in a weak economic climate.

June's higher-than-expected PPI reading is not a "sign inflation is building," said Bret Barker, portfolio manager with Metropolitan West Asset Management in Los Angeles. (Reporting by Richard Leong and Jennifer Ablan, editing by W Simon)