Gas prices fall in May, keeping lid on inflation

'Core' price increase labeled as temporary

6/16/2011

WASHINGTON -- 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 gasoline prices and supply disruptions stemming from the Japan earthquake and tsunami -- are starting to ease.

Consumer prices rose 0.2 percent, the smallest increase in six months, the Labor Department said Wednesday. It was the first drop in energy costs in nearly a year.

Gasoline 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 because temporary increases in cotton and other commodities forced 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. car makers. And tornadoes in the United States 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.

"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.

Some inflation can be healthy for the economy because it encourages people to spend and invest rather than sitting on their cash. More spending drives corporate growth, which makes businesses more likely to hire people.

But higher food and gas prices have hurt growth this year.