Worries grow for US economy as inflation heads upwards

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 yesterday 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 per cent.

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 per cent rise in May industrial output, though the latter was partly the result of a pullback in utilities tied to cool weather.

“People will look at this as another reason the recovery is stalling, giving more fodder to the double dip theory,” said an analyst.