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Gasoline Lifts U.S. Consumer Prices; Economy Picks Up Speed Price stability and a strengthening economy, highlighted by a tightening labor market, likely will push the Federal Reserve a step closer to raising interest rates later this year.

By Reuters

This story originally appeared on Reuters


U.S. consumer prices in May recorded their largest increase in more than two years as gasoline prices surged, suggesting the impact of lower oil prices on inflation probably was fading.

Other data on Thursday showed the economy was gaining speed after stumbling in the first quarter. New applications for unemployment benefits fell last week to a near 15-year low and factory activity in the mid-Atlantic region accelerated to a six-month high in June.

Price stability and a strengthening economy, highlighted by a tightening labor market, likely will push the Federal Reserve a step closer to raising interest rates later this year.

In its latest policy statement, the U.S. central bank on Wednesday said the economy was growing moderately and expressed confidence inflation would gradually move toward its 2 percent target.

Still, rate hikes will likely be gradual as a strong dollar continues to dampen underlying price pressures. The Fed has kept its key short-term lending rate near zero since December 2008.

"We think inflation will grind higher over the summer and open the door to a September rate hike. At the same time, low underlying inflation pressures mean the tightening cycle will only be gradual," said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York.

The Consumer Price Index rose 0.4 percent last month after gaining 0.1 percent in April, the Labor Department said. That was the largest increase since February 2013, and left the CPI unchanged in the 12 months through May after a 0.2 percent yearly decline in April.

While energy prices are stabilizing, a strong dollar is weighing on underlying inflation pressures. The so-called core CPI, which excludes food and energy costs, rose 0.1 percent, the smallest increase in five months, after a 0.3 percent jump in April.

In the 12 months through May, the core CPI rose 1.7 percent, slowing from a yearly increase of 1.8 percent in April.

The Fed monitors a different inflation measure that is trending even lower than the CPI.

The dollar fell against a basket of currencies, while U.S. stock indexes were trading higher. Prices for U.S. Treasury debt fell.

In a second report, the Labor Department said initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 267,000 for the week ended June 13. It was the 15th straight week that claims held below 300,000, a threshold usually associated with a firming labor market.

Healthy Jobs Market

The claims data covered the period in which the government surveyed employers for the payrolls portion of June's employment report. Jobless claims fell 8,000 between the May and June survey periods, suggesting another month of solid job gains.

"The labor market appears to be in good health through the June payroll survey period. This ongoing labor market resilience is important, because it underpins our forecast of a rebound in the economy during the remainder of 2015," said Guy Berger, an economist at RBS in Stamford, Connecticut.

Growth prospects were further boosted by a third report from the Philadelphia Federal Reserve Bank showing its business activity index jumped to a reading of 15.2 in June, the highest level since December, from 6.7 in May.

A reading above zero indicates expansion in the region's factories. Measures of new orders and shipments also rose to their highest levels since November.

While manufacturers reported a rise in the cost of inputs, they were also increasing prices for their goods, a trend that supports the view that inflation will creep higher in the months ahead.

The economy's firming tone was underscored by yet another report from the Conference Board showing its Leading Economic Index rose 0.7 percent last month after a similar gain in April.

"Both reports provided some support to the current underlying narrative that the positive momentum in domestic economic activity is being sustained," said Millan Mulraine, deputy chief economist at TD Securities in New York.

A 10.4 percent jump in gasoline prices in May accounted for most of the increase in the CPI. It was the biggest increase since June 2009, and followed a 1.7 percent decline in April.

While food prices were unchanged for a second straight month, an outbreak of bird flu in some parts of the country that has led to a shortage of eggs could push up prices.

Rents increased 0.3 percent last month. With the residential vacancy rate near a 22-year low as a firming labor market boosts household formation, shelter costs are likely to continue rising. That, together with expectations that a tighter labor market will spur stronger wage growth, is expected to limit the dollar's drag on core inflation.

There were increases in the cost of medical care, new motor vehicles, airline fares, tobacco and alcoholic beverages last month. But prices for apparel, used cars and trucks, and household furnishings fell.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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