Falling energy prices cooled inflation in May and U.S. factories rebounded after natural disasters slowed production for the first time in nearly a year.
The latest economic data suggest two of the biggest factors that hampered the economy this spring — high gas prices and supply disruptions stemming from the Japan crises — are starting to ease.
Overall consumer prices rose 0.2 percent, the smallest increase in six months, the Labor Department said. It was the first drop in energy costs in nearly a year.
Gas prices have fallen since peaking last month at a national average of $3.98 per gallon. On Tuesday, the national average price was roughly $3.69 per gallon. While that is giving motorists some relief, gas prices are still $1 higher than a year ago.
So-called “core” consumer prices, which exclude volatile food and energy, rose by the most in nearly three years last month. Economists say that’s mostly because temporary increases in cotton and other commodities are forcing up costs.
Inflation “is probably now close to peaking,” said Paul Ashworth, an economist at Capital Economics. “While the bigger monthly rise in core prices is a concern, a lot of it was due to temporary factors that could be reversed in the next few months.”
U.S. factories produced more business equipment and construction materials last month, the Federal Reserve said. That boosted manufacturing output 0.4 percent last month, the Federal Reserve said. The gain followed the first decline in 11 months of gains.
Overall industrial production was basically flat for the second month in a row. It was dragged down by a decline in utility activity caused by milder spring weather.
Mr. Ashworth said the report confirms that the April decline in factory output was a temporary lull. The March 11 earthquake in Japan created a parts shortage that affected U.S. automakers. And tornadoes in the U.S. slowed factory output in the South. Mr. Ashworth said factories are back to increasing production. But the rate of growth has slowed since last year.
“Certainly things have slowed down a bit, but I don’t think it’s a big deal,” he said. “Things seem to be getting back to normal in Japan, so supply disruptions should ease up and it should unwind itself.”
Economists expect factory output to keep growing in the coming months as Japanese automakers, such as Toyota and Honda, bring production at their U.S. plants back to pre-earthquake levels. Full production likely won’t be restored until fall.
Other reports Wednesday show the economy, for now, is still weak. A survey of manufacturers in the New York region found that activity slowed in June. The New York Federal Reserve’s Empire State index fell to -7.8, down from 12 the previous month. Any reading below zero indicates that the sector is shrinking.
And homebuilders are getting even more pessimistic, according to a report from the industry’s trade group. An index that measures builders’ sentiment fell to 13 in June. That’s the lowest level in nine months and just five points about the record low, reached in January 2009.
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