(Adds details, analyst comments)
By Lucia Mutikani
WASHINGTON, July 13 (Reuters) - U.S. import prices fell the most in more than two years in June as prices for petroleum products fell and a strong dollar weighed on the costs of other goods.
Economists said the unexpected drop in import prices reported by the Labor Department on Friday was likely temporary given tariffs imposed by the Trump administration on lumber, steel and aluminum imports to protect domestic industries from what it says is unfair foreign competition.
The government has also slapped 25 percent duties on $34 billion of Chinese imports and President Donald Trump this week threatened 10 percent tariffs on $200 billion of Chinese goods.
“Odds are that the tariffs will begin to boost import prices,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “The inflationary impact of the steel and aluminum tariffs has been modest, partly because a number of countries initially were exempt, but that has changed.”
The Labor Department said import prices dropped 0.4 percent last month, the largest decline since February 2016, after jumping 0.9 percent in May. Economists polled by Reuters had forecast import prices edging up 0.1 percent in June.
In the 12 months through June, import prices increased 4.3 percent following a 4.5 percent advance in May.
Imported food prices dropped 2.6 percent last month, the biggest decrease since February 2012, after rising 0.4 percent in May. Prices for imported petroleum fell 0.8 percent after accelerating 7.4 percent in May. June’s drop reflected a decline in crude oil prices, which has since reversed.
Excluding petroleum, import prices slipped 0.3 percent in June. That was the largest drop in two years and followed a 0.1 percent gain in the prior month. Import prices excluding petroleum rose 1.4 percent in the 12 months through June.
Import prices excluding petroleum were probably held down by the dollar’s 1.6 percent appreciation against the currencies of the United States’ main trading partners in June.
The dollar has firmed 3.8 percent on trade-weighted basis so far this year, which supports economists’ thesis of a gradual increase in inflation even as the labor market tightens.
An inflation measure tracked by the Federal Reserve for monetary policy hit the U.S. central bank’s 2 percent target in May for the first time in six years. Inflation is expected to modestly overshoot its target.
“While we think a tightening labor market will keep upward pressure on pricing in the US, the recent strengthening in the dollar, along with declines in various commodity prices related to food and energy, likely depressed the June import price data,” said Daniel Silver, an economist at JPMorgan in New York.
Import prices for nonfuel industrial supplies and materials increased 0.3 percent in June, driven by higher prices for metals and paper, after rising 0.8 percent in the prior month.
The cost of imported capital goods fell 0.1 percent for a second straight month as did prices for imported motor vehicles. Consumer goods prices, excluding automobiles, recorded their biggest drop since November 2016.
While prices for goods imported from China were unchanged in June, they rose 0.5 percent year-on-year, which was the largest gain in two years.
“Once the tariffs start feeding through, import prices are likely to reflect them first,” said Blerina Uruci, an economist at Barclays in Washington. “It will then likely feed through with a longer lag and to a smaller extent to producer prices and consumer prices.”
The Labor Department also reported that export prices increased 0.3 percent in June after rising 0.6 percent in May. Prices for agricultural products fell 1.0 percent last month, pulled down by a 2.6 percent drop in soybean prices. Export prices for corn tumbled 3.1 percent. (Reporting By Lucia Mutikani; Editing by Steve Orlofsky and Chizu Nomiyama)