By Lucia Mutikani
WASHINGTON (Reuters) - U.S. producer prices fell in May after two month of solid gains, but the decline was not enough to change perceptions that inflation pressures are steadily creeping up.
The Labor Department said on Friday its producer price index for final demand slipped 0.2 percent after advancing in April by 0.6 percent, which was the largest gain in 1-1/2 years.
Economists, who had expected producer prices to edge up, saw the decline as a correction after gains in March and April, and said it did not change their view that prices were firming.
"The net result is a pick-up. The net strengthening makes the modest acceleration in the more important consumer inflation measures more credible," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.
The government revamped the PPI series at the start of the year to include services and construction. Big swings in prices received for trade services have injected volatility into the series, making it hard to get a good read on inflation.
The overall inflation backdrop remains generally tame, with the main gauge watched by the Federal Reserve continuing to run below the U.S. central bank's 2 percent target.
Still, key consumer inflation measures pushed up in April and are expected to continue edging higher as the labor market tightens and the economy regains momentum. That should position the Fed to raise interest rates in the second half of 2015.
MOVING TOWARDS TARGET
The U.S. central bank, which is already scaling back the amount of money it is injecting into the economy through monthly bond purchases, has kept overnight lending rates near zero since December 2008. Fed officials meet on Tuesday and Wednesday to assess the economy's health and their monetary policy stance.
"They will probably say inflation is trending toward its 2 percent goal," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
A separate report showed consumer sentiment slipped slightly in early June. The Thomson Reuters/University of Michigan's consumer sentiment index was at 81.2 from 81.9 in May.
The report offered a mixed reading on the outlook for prices. Households' prediction of inflation a year out fell to a six month low of 3.0 percent from 3.3 percent in June, but the five-year projection ticked up to 2.9 percent from 2.8 percent.
Producer inflation in May was depressed by broad price declines at the factory gate, while wholesale food prices snapped four consecutive months of increases.
There were also declines in the prices of trade services, a gauge of retailers' and wholesalers' margins.
And while wholesale gasoline prices fell last month, economists cautioned increases were in the cards because of the unrest in Iraq.
A recent spike in the price of oil "should filter through to the economy over the next several months, especially if the sectarian violence (in Iraq) continues," said Jay Morelock, an economist at FTN Financial in New York.
In the 12 months through May, prices received by the nation's farms, factories and refineries rose 2.0 percent, moderating from April's 2.1 percent gain.
Producer prices excluding food, energy and trade services were flat after advancing 0.3 percent the prior month.
(Reporting By Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Andrea Ricci and Meredith Mazzilli)