Inflation Gauge Ticks Up as Trade Gap Narrows

Steep energy costs drove up producer prices more sharply than expected last month, but strong overseas growth and a weaker dollar helped narrow the trade deficit in June, reports on Tuesday showed.

The data comes as Wall Street debates whether the Federal Reserve will need to cut interest rates as credit terms tighten in the wake of the subprime mortgage market mess.

The Fed said last week that inflation remained its predominant concern, although it acknowledged that credit conditions had tightened for some households and businesses.

U.S. producer prices rose by a more-than-expected 0.6% in July, Labor Department data on Tuesday showed, but the gain was driven by energy costs and core inflation facing producers grew only slightly.

Economists polled by Reuters forecast producer prices -- a gauge of the prices paid at the farm and factory gate -- would rise 0.2% last month from an unrevised 0.2% fall in June.

Stripping out volatile food and energy costs, producer prices advanced 0.1%, less than the 0.2% increase forecast, following an unrevised 0.3% rise in June. On a year-on-year basis, core producer prices were up 2.3%, the largest gain since a 2.6% increase in September 2005, the Labor Department said.

Core producer prices excluding the price of cars and light trucks were unchanged, a Labor Department official said. Gasoline prices jumped 3.2% in July.

"The market is only going to care about the core (PPI figure), which is better than expected. I don't think it does much to stocks. 0.1 is a good number and probably keeps the Fed happy with where they are now," said Robert Macintosh, chief economist at Eaton Vance Management in Boston.

Producer prices were released one day ahead of July's reading on U.S. consumer inflation, which will be watched closely by the Federal Reserve.

The U.S. central bank said last week that inflation was its predominant concern, when it held interest rates steady at 5.25%. But financial market turmoil since then sparked by fears over the availability of credit may have dimmed this threat and could dampen growth.

Trade Gap Narrows

Separately, the U.S. trade deficit unexpectedly narrowed in June as a weaker dollar and overseas growth boosted exports to a record, offsetting record imports lifted by higher oil prices and strong capital goods imports, a government report showed on Tuesday.

The June trade gap totaled $58.1 billion, down 1.7% from a downwardly revised May deficit of $59.2 billion, originally reported as $60 billion. The June deficit was the smallest since February's $57.6 billion gap and was below the median forecast of $61 billion from Wall Street analysts polled by Reuters, according to the Commerce Department data.

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.

Markets mostly shrugged off the trade data, focusing instead on separate data showing a bigger-than-expected 0.6% rise in U.S. producer prices in July. The dollar remained steady, while U.S. Treasury debt prices edged lower and stock index futures were also off slightly.

U.S. imports rose 0.5% to $192.7 billion as the U.S. oil import bill edged higher to $19.6 billion and imports of capital goods such as computers hit a new record.

The average price for crude oil rose $1.59 a barrel to $60.95, the highest since $62.40 in September 2006. Imports from the Organization of Petroleum Exporting countries, however, decreased 4.6% to $13.9 billion.

The closely watched U.S. trade deficit with China widened 5.7% in June to $21.2 billion, despite record exports of $5.9 billion to China. Imports from China rose 6.8% or $1.7 billion to $27.1 billion, the highest since November 2006.

China last week reported that its own global trade surplus edged lower in July to $24.36 billion from a record $26.91 billion in June as rebates of value added taxes were eliminated on July 1 for 2,800 export product lines.