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Posted: Wednesday, July 16th 2014 at 9:42am

US factory output rises for 5th straight month; inflation remains tame

By The Associated Press
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WASHINGTON (AP) -- U.S. factory output increased for the fifth straight month in June as manufacturers cranked out more aircraft, chemicals and furniture. In a separate government report, the Labor Department said Wednesday that inflation remains stable.

The Federal Reserve says factory production rose 0.1 percent, down from a gain of 0.4 percent in the previous month. May's data was revised slightly lower, but April's reading was revised much higher.

While last month's increase was modest, manufacturers strongly boosted output in the April-June quarter. That has helped the economy return to growth after a sharp contraction in the first three months of the year. Factory output rose 6.7 percent in the second quarter, the most in more than two years.

Overall industrial production, which includes manufacturing, mining and utilities, edged up 0.2 percent in June, down from 0.5 percent in May.

INFLATION REMAINS TAME

Rising gasoline costs pushed up the prices U.S. companies receive for their goods and services in June, but overall inflation remains tame.

The Labor Department said Wednesday that the producer price index, which measures the cost of goods and services before they reach the consumer, rose 0.4 percent last month. The increase follows a 0.2 percent decrease in May.

Gas costs rose 6.4 percent in June. Steel prices shot up 3 percent. But prices fell for grains, cheese and rental cars to offset some of those increases.

In the past 12 months, producer prices have risen 1.9 percent, roughly in line with the Federal Reserve's inflation target of 2 percent.

But inflation appears unlikely to accelerate based on producer prices. Crude oil prices have fallen in July, after surging last month on reports of Iraq being destabilized by the Sunni militia known as the Islamic State of Iraq and the Levant.

"Nothing here is going to worry the Fed, particularly not when crude oil prices have most recently fallen back," said Paul Ashworth, chief US economist at Capital Economics.

Consumer prices have tended to track the costs for producers. They rose in May in response to food and energy costs increasing earlier in the year for wholesalers. Consumer prices rose 2.1 percent in May compared to the year prior.

Retailer and wholesaler profit margins increased 0.2 percent in June. Excluding the volatile food, energy and profit margin categories, core producer prices were up 0.2 percent last month.

The Fed targets inflation at about 2 percent as a guard against deflation, which can drag down wages and spark a recession. At the same time, the Fed wants to avoid excessive inflation and protect consumers and the purchasing power of the dollar.

Low inflation should provide a foundation for consumers to spend, but it also reflects the weak recovery from the Great Recession that is now entering its sixth year. Businesses are reluctant to raise their prices, if their customers lack the income to afford their goods and services.

Wage growth has been meager and unemployment, now at 6.1 percent, has been slow to recede since the recession. That has limited consumer spending, which accounts for about 70 percent of all economic activity.

Still, low inflation has enabled the Fed to pursue extraordinary measures to boost the economy. This includes holding shorter-term interest rates near zero and purchasing bonds to depress longer-term interest rates. It has begun to unwind some of those measures, cutting its monthly bond-buying program to $35 billion from $85 billion last year.

Those bond purchases had ensured low interest rates that encouraged investors to pour money into the economy.
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