By Lucia Mutikani

WASHINGTON (Reuters) – U.S. import prices increased by the most in more than a year in May, driven by higher costs for petroleum products and food, which could further diminish fears of deflation as the economy battles a recession.

The report from the Labor Department on Friday followed data this week showing consumer prices falling moderately in May and a solid rebound in producer prices.

Deflation is a decline in the general price level, which is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices. The National Bureau of Economic Research, the arbiter of U.S. recessions, declared on Monday that the economy slipped into recession in February.

“These gains should support June increases for CPI and PPI,” said Mike Englund, chief economist at Action Economics in Boulder, Colorado. “Trade prices should rise further in June with oil prices, alongside a lift from a drop-back in the value of the dollar, though we have an ongoing headwind from demand destruction with global shutdowns.”

Import prices rose 1.0% last month, the largest gain since February 2019, after falling 2.6% in April. Economists polled by Reuters had forecast import prices, which exclude tariffs, increasing 0.6% in May. In the 12 months through May, import prices decreased 6.0% after dropping 6.8% in April.

The Federal Reserve, which tracks the core personal consumption expenditures price index for its 2% inflation target, sharply lowered its inflation projections on Wednesday. The U.S. central bank projected core inflation rising 1.0% this year and picking up to 1.5% in 2021. Back in December, it forecast inflation at 1.9% this year and 2% in 2021.

Stocks on Wall Street were trading higher after tumbling in the previous session on fears of a resurgence in COVID-19 infections. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.

EXPORT PRICES RISE

In May, prices for imported fuels and lubricants surged 20.5% after declining 31.0% in the prior month. Petroleum prices jumped 21.7% after plunging 32.6% in April. Imported food prices rebounded 2.2% last month after dropping 1.6% in April.

Excluding fuels and food, import prices dipped 0.1% last month after falling 0.5% in April. The so-called core import prices declined 0.7% in the 12 months through May.

The cost of goods imported from China was unchanged in May after gaining 0.1% in the prior month. Prices declined 1.0% year-on-year in May, the smallest drop since March 2019.

Last month, prices for imported capital goods was unchanged. The cost of imported motor vehicles dipped 0.1%. Prices for consumer goods excluding autos rose 0.1%.

The report also showed export prices increased 0.5% in May as higher prices for nonagricultural products offset lower prices for agricultural goods. That followed a 3.3% drop in April. Export prices declined 6.0% on a year-on-year basis in May after dropping 6.8% in April.

Prices for agricultural exports declined 0.5%, pulled down by weaker prices for corn, dairy products and soybeans. That more than offset higher prices for meat, vegetables and cotton. Agricultural export prices fell 3.5% year-on-year.

Nonagricultural export prices rose 0.6%, boosted by higher prices for industrial supplies and materials, which overcame decreases in prices for capital goods, consumer goods, automotive vehicles, and nonagricultural foods.

(Reporting By Lucia Mutikani; Editing by Alex Richardson and Andrea Ricci)