Pricey tobacco pushes up core producer inflation (Reuters)

WASHINGTON (Reuters) – Core producer prices rose at their fastest pace in six months in July on strong tobacco and light truck costs, though weak domestic demand was seen keeping inflation pressures under control.

The Labor Department said on Wednesday its seasonally adjusted index for prices paid at the farm and factory gate, excluding food and energy, rose 0.4 percent -- the largest increase since January -- after rising 0.3 percent in June.

Economists, who had expected a 0.2 percent rise last month in the so-called core rate, said July's gain should not alter the Federal Reserve's prediction of low inflation in the near-term. Producers' pricing power is limited by a 9.1 percent unemployment rate.

"There is a high level of unemployment and low level of capacity utilization," said Christopher Probyn, chief economist at State Street Global Advisors in Boston. "I don't think that the U.S. economy is in a position to generate a sustained acceleration in inflation."

The Fed last week promised to keep interest rates near zero for the next two years to stimulate growth, saying the outlook for inflation over the medium-term was subdued.

The U.S. central bank has suddenly come under harsh scrutiny from Republican campaigners for the 2012 presidential nomination who say its easy money practices and lack of transparency are a threat to national economic stability.

Texas Governor Rick Perry even suggested on Monday that Chairman Ben Bernanke's policies could be considered "treasonous" if the Fed "prints more money between now and the election" in November 2012.

The Fed has injected about $2.3 trillion into the economy through purchases of government and agency debt since late 2008, measures intended to increase credit availability, but that some see as setting the stage for future inflation.

TOBACCO PRICES SURGE

U.S. stocks rose on strong earnings and a jump in oil prices, while U.S. government debt prices were little changed.

A spike in food and energy prices pushed up inflation early this year, but weak economic growth and high unemployment kept underlying price pressures contained.

In the 12 months to July, core producer prices increased 2.5 percent, the largest rise since June 2009.

The economy hardly grew in the first half of 2011 and a moderate expansion pace is expected for the rest of the year.

But some economists cautioned that regardless of anemic demand, the Fed could find itself with an inflation problem.

"Producer expenses are on the rise and while weak demand may limit pricing power, the pressure on costs will cause firms to look for any way possible to pass on those increases," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

"The Fed's policy is likely to produce higher than desired inflation in the future and I would not be surprised to see the Fed's most closely watched indices all exceed the upper end of the target range by year's end."

Tobacco accounted for almost a quarter of the rise in the monthly core PPI rate, with light motor trucks and pharmaceuticals also making significant contributions.

Tobacco surged 2.8 percent, the largest increase since March 2009. Light truck prices increased 1 percent, still reflecting the lingering effects of disruptions to production caused by the March earthquake in Japan.

However, motor vehicle production rebounded strongly in July, which should help to ease the price pressure.

Overall prices received by producers rose 0.2 percent last month, above economists' expectations for a 0.1 percent gain, after falling 0.4 percent in June.

Overall producer prices were bumped up by food costs, which rose 0.6 percent as potatoes recorded their biggest increase in almost a year. Gasoline prices, however, fell 2.8 percent.

In the 12 months to July, producer prices rose 7.2 percent after increasing 7.0 percent the prior month. The rise was above economists' expectations for a 7.0 percent advance.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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China quarterly growth tops forecast, boosts inflation fight (Reuters)

BEIJING (Reuters) – China's economy grew faster than expected in the second quarter, easing fears of a hard landing and strengthening Beijing's resolve to fight persistently high inflation.

China's statistics office said on Wednesday that stabilizing prices remained the top priority, even though a "complex and volatile" global economy posed a threat to growth, complicating the policy choices.

Second-quarter gross domestic product rose 9.5 percent from a year earlier, exceeding economists' forecasts for 9.4 percent growth, helped by solid domestic consumption and investment.

But that was still the slowest pace since the third quarter of 2009, when the world economy was pulling out of its worst recession in 80 years.

Some cooling was expected -- and even welcome -- because China has raised interest rates and clamped down on bank lending to try to ease inflation, which hit a three-year high in June. The stronger-than-expected GDP figures suggest Beijing may have more room to tighten without choking off growth.

"These are very good numbers," said Liu Li-Gang, an economist with ANZ in Hong Kong.

"This is perhaps the reason the (central bank) raised interest rates last week. They are showing they are not afraid of a significant slowdown in the economy."

For investors worried that Beijing's tightening campaign might exact too heavy a toll on the fastest-growing major economy in the world, the figures offered some reassurance. Industrial output in June was also stronger than expected, growing at its fastest pace in over a year.

Asian stocks, metals and the Australian dollar all rose.

China's GDP in April to June rose 2.2 percent from the first quarter on a seasonally adjusted basis, a slight pick-up in pace from 2.1 percent in the first quarter.

Chinese officials have struck a hawkish note in recent days, mindful of the risk that overheating inflation could stoke civil unrest.

Although many economists think overall inflation pressures will ease during the second half of the year, prices have soared for popular staples such as pork and it will take time for them to recede.

A small majority of analysts expect the central bank to raise interest rates again this year and most forecast further increases in bank reserve ratios, a Reuters poll last week showed.

Sheng Laiyun, a spokesperson for China's statistics bureau, said stabilizing inflation was the primary goal, and policies would be "targeted, flexible and effective," echoing recent remarks by Premier Wen Jiabao.

"It's not easy and China has done a great job to maintain fast economic growth when the global situation is complex and volatile," Sheng said.

Europe's sovereign debt troubles and a slowdown in the U.S. economy means two of China's best export customers are struggling. New export orders slipped in June, a manufacturing survey showed earlier in July, which raised questions about China's growth prospects.

But Wednesday's figures suggested domestic demand remains robust. Final consumption contributed 4.6 percentage points to first-half growth, while exports subtracted slightly, China's statistics bureau said.

Analysts say China's economy is on course for growth well above 9 percent this year, a rate that would be the equivalent of adding Switzerland's GDP to the $6 trillion economy.

Still, demand weakness in China's Western export markets may cause economic growth to slacken in the third quarter from the second, they say.

REBALANCING

Industrial output rose 15.1 percent in June from a year earlier, the strongest growth since May 2010. It also marked a sharp quickening from May's 13.3 percent and beat market expectations of 13.1 percent.

The growth figures underlined the resilience of the world's second-largest economy, thanks to the country's rapid urbanization, and could soothe investor concerns about an abrupt slowdown that would dent demand for global commodities.

"The data should also help to dispel the wilder fears of an economic collapse in China," said George Worthington, an economist with IFR, a Thomson Reuters unit.

Fixed-asset investment grew 25.6 percent in the first six months from a year earlier, while retail sales expanded 16.8 percent, showing that domestic demand still held up relatively well despite policy tightening.

"The economic growth data are quite upbeat and industrial production is noticeably stronger than expected," said Xu Biao, an economist with China Merchants Bank in Shenzhen. "It's quite beyond expectations as Chinese imports and (purchasing manager's survey) in June were quite weak."

Stronger demand at home not only helps insulate China from the global turmoil, it provides a bit of a buffer for the rest of the world and evidence that Beijing is making good on pledges to move away from export-driven growth. But it can also increase price pressures.

Fighting inflation remains Beijing's top priority but any policy steps should avoid causing big swings in economic growth, Premier Wen said in comments published on Tuesday.

He signaled in June that the country would struggle to meet its 4 percent average inflation target in 2011. Monthly consumer price figures show inflation averaged 5.4 percent in the first half of the year.

An academic adviser to the People's Bank of China was quoted by state television on Wednesday as saying the inflation rate may have peaked in June, when it hit 6.4 percent.

Li Daokui, a member of the central bank's monetary policy committee, said the full-year inflation rate could be around 4.8 percent.

Last Wednesday, China raised rates by 25 basis points -- the third such increase this year -- which took the one-year bank deposit rate to 3.5 percent.

The central bank has raised benchmark interest rates five times since October and lifted banks' reserve requirement ratio -- its preferred policy tool so far -- nine times.

(Additional reporting by Langi Chiang, Gui Qing Koh and Zhou Xin: Writing by Emily Kaiser: Editing by Neil Fullick)

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ECB flags July rate rise as inflation stays high (Reuters)

BRUSSELS (Reuters) – The European Central Bank signaled it would raise interest rates again next week as data showed inflation in June stabilized well above the bank's target.

"We are strongly determined to secure that inflation expectation remain firmly in-line (with our expectations)," ECB President Jean-Claude Trichet told the European Parliament's economic and monetary affairs committee in regular testimony.

"The current monetary policy is accommodative and ... as I said we are in a state of strong vigilance," he said.

The phrase "strong vigilance" has regularly been deployed to signal a rate hike at the next meeting and the ECB is meeting on interest rates next Thursday.

The euro hit a fresh three-week high against the dollar in response, while it also remained supported as Greece moved a step closer to securing international aid after voting in favor of austerity measures.

The European Union's statistics office said consumer prices in the 17 countries using the euro were 2.7 percent higher in June than a year earlier, the same as in May. Economists polled by Reuters had forecast a figure of 2.8 percent.

The ECB wants to keep inflation below, but close to 2 percent and already raised its refinancing interest rate in April by 25 basis point to 1.25 percent to curb price growth.

No breakdown of monthly data is available with the early estimate, but the June inflation is likely to be largely an result of more expensive oil.

"There are signs that euro zone price pressures are starting to ease, although much will clearly depend on oil price developments," said Howard Archer, economist at IHS Global Insight.

"Slowing euro zone growth after the first-quarter spike up and still relatively high unemployment are likely to put a brake on underlying inflationary pressures," he said.

"It is notable that the European Commission's business and consumer confidence survey for June showed consumers' inflation expectations falling back appreciably for a second successive month and pricing expectations among companies falling back in all sectors," he added.

Trichet's use of the key "strong vigilance" phrase to signal a rate rise ends market speculation that the bank could delay another increase in borrowing costs because of the debt crisis in Greece and the contagion threat it poses to other euro zone countries.

But economists said Greece's problems and their potential impact on the euro zone could still make the bank delay the next interest rate rise, which economists expect will happen later this year, taking the refinancing rate to 1.75 percent.

"Slowing euro zone growth, evidence that underlying inflationary pressures remain moderate and still serious concerns over the Greek situation suggest that the ECB could hold off from acting for some time to come after the signaled July interest rate hike," Archer said.

(Reporting by Jan Strupczewski, additional reporting by Paul Carrel in Frankfurt, editing by Rex Merrifield)

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