US economy faces weaker growth, higher prices

The US economy is facing a troubling mix of higher prices and weak growth.
Underlying US inflation rose to its highest level in nearly three years in May, while a regional factory gauge posted a surprise contraction this month, reports on Wednesday showed. American consumers did get some relief on prices from lower gasoline costs, which could help the economy emerge from a recent rough patch if sustained.
But in a trend that could trouble policymakers at the US Federal Reserve, the Labour Department said the consumer price index outside food and energy surged 0.3 percent.
That was the largest gain since July 2008, though some of the spike appears to reflect supply disruptions from Japan's earthquake that pushed auto prices sharply higher.
Separate reports showed a striking decline in New York State manufacturing activity and a disappointing 0.1 percent rise in May industrial output, though the latter was partly the result of a pullback in utilities tied to cool weather.
The housing sector, which was at the epicenter of the US financial crisis and recession, also showed little sign of healing. Following a renewed decline in home prices in recent months, a homebuilder sentiment index published by an industry group plunged to its lowest since November 2010 this month.
Despite the weakness, the inflation readings could put Fed officials in a tough spot. If the economy weakens further but inflation fails to come down, it would be difficult for them to justify another round of monetary stimulus, particularly given the controversy that surrounded the $600 billion bond-buying program the central bank launched in November.
"Core inflation pressures are a lot stronger than we've been seeing in recent months," said Dean Maki, head of US economic research at Barclays Capital in New York. "This will make the Fed more cautious on any additional actions."
US stocks opened sharply lower on worries over the debt crisis in Greece, which were compounded by the weak New York Fed factory survey, while Treasury debt prices soared. Concerns over Greece and the stiff reading on core inflation helped lift the dollar against the euro.
US inflation proved firmer than expected in May despite lower fuel costs. The overall CPI rose 0.2 percent, when analysts had been looking for a 0.1 percent rise.
In the year to May, prices climbed 3.6 percent, the largest rise since October 2008. Gasoline prices dropped 2 percent last month after increasing 3.3 percent in April, but food prices proved less benign, rising 0.4 percent for a second month in a row.
Industrial output, while still growing, was at best anemic. Fed data showed production at the nation's mines, utilities and factories edged up 0.1 percent in May, restrained by a second consecutive drop in auto output as producers had trouble getting needed parts.