July 16, 2013 / 1:10 PM / 6 years ago

WRAPUP 3-U.S. inflation shows signs of stability after downward drift

* Consumer prices rise 0.5 percent in June
    * Core CPI rises 0.2 percent for second straight month
    * Report shows disinflation trend fading
    * Industrial production rises 0.3 percent in June

    By Lucia Mutikani
    WASHINGTON, July 16 (Reuters) - U.S. consumer prices picked
up in June and underlying inflation pressures showed signs of
stabilizing, keeping on course expectations the Federal Reserve
will start reducing its bond purchases later this year.
    While inflation remains benign, the increase last month
should help ease worries among some Fed officials that price
pressures in the economy were too low.
    "Inflation is carving out a bottom. We are likely to see
inflation tick up slightly in the second half of this year,"
said Ryan Sweet, a senior economist at Moody's Analytics in West
Chester, Pennsylvania. "The modest acceleration is welcome news
for the Fed." 
    The Labor Department said on Tuesday its Consumer Price
Index increased 0.5 percent, the largest gain since February,
after nudging up 0.1 percent in May.
    A 6.3 percent surge in gasoline prices accounted for about
two thirds of the increase.
    In the 12 months through June, the CPI advanced 1.8 percent,
an acceleration from the 1.4 percent logged in the period
through May and the largest increase since February.
    Stripping out energy and food, consumer prices increased 0.2
percent for a second straight month.
    That took the increase over the past 12 months to 1.6
percent, the smallest rise since June 2011. The core CPI had
gained 1.7 percent in May. 
    Although both inflation measures remain below the Federal
Reserve's 2 percent target, the report showed signs of fading
disinflation pressures, with medical care costs increasing after
being subdued for the past two months.
    Prices for new motor vehicles, apparel and household
furnishings also rose.
    The signs of stabilization offered by the monthly core
measure fit in with Fed Chairman Ben Bernanke's assessment that
a downward drift in the inflation rate was temporary.
    Bernanke said last month the central bank would likely later
this year start cutting back the $85 billion in bonds it is
purchasing each month to keep borrowing costs low. Economists
expect the Fed to begin reducing the amount in September.
    "The lack of further slowing in core inflation on a monthly
basis in the last two months helps keep Fed tapering on track,"
said Jim O'Sullivan, chief U.S. economist at High Frequency
Economics in Valhalla, New York.

    While the year-on-year core CPI rate could slip further in
coming months, it should reverse course as economic growth
accelerates over the last half of the year, economists said.
    They expect a drop in unemployment to boost wage growth.
    That optimism about the economy's prospects was bolstered by
a separate report from the Fed showing output at the nation's
factories, mines and utilities rose 0.3 percent in June after a
flat reading in May.
    The increase reflected a 0.3 percent rise in manufacturing
output. Economists said it suggested some pickup in economic
activity at the end of the second quarter. Growth in the
April-June period is forecast at an annual pace of between 0.5
percent and 1.0 percent, far below the first-quarter's 1.8
percent rate. 
    "If manufacturing growth is on the verge of accelerating
into the second half of the year, this, along with solid gains
in housing, should support growth in the second half of 2013,"
said John Ryding, chief economist at RDQ Economics in New York.
    Another report on Tuesday showed confidence among
single-family home builders soared to a 7-1/2 year high in July,
amid expectations of stronger sales and buyer traffic. 
    U.S. financial markets were little moved by the data as
investors awaited testimony Bernanke is set to deliver to
Congress on the economy on Wednesday.
    Tepid growth has kept a lid on inflation pressures, but some
pockets of pricing power are starting to emerge. 
    Last month, owners' equivalent rent, which accounts for
about a third of the core CPI, increased 0.2 percent after a
similar gain in May. Apparel prices recorded their largest
increase in nearly two years, while new motor vehicle prices
rose after being flat in May. 
    Medical care services rose 0.4 percent, the largest increase
in a year. Medical care, which makes up about 10 percent of the
core CPI, had been subdued in April and May. The cost of medical
care commodities rebounded 0.5 percent, reversing the prior
month's decline, as the price of prescription drugs increased. 
    Tame medical care costs have been one of the key
contributors to the low inflation rate over the past months. 
    Economists cite a host of reasons for the lack of pressure
on health care costs, ranging from the expiration of patents on
several popular prescription drugs to government spending cuts
that have cut payments to doctors and hospitals for Medicare.
    "We think the impact of these transitions has started to
fade away and we expect that drug price inflation may start to
pick up over the months ahead," said Ryan Wang, a U.S. economist
at HSBC in New York.
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