U.S. core consumer inflation rose more than expected in May to post its largest increase in nearly three years, lifted by steep rises in motor vehicle and apparel prices.

A gauge of manufacturing in New York State showed the sector unexpectedly contracted in June, falling below zero for the first time since November 2010 in another sign the economic slowdown could become more protracted, the New York Federal Reserve said in a report on Wednesday.

COMMENTS:

JOSH FEINMAN, CHIEF GLOBAL ECONOMIST, DB ADVISORS, NEW YORK

CPI:

The core reading of 0.3 percent is surprising and somewhat disturbing. I remain pretty sanguine about inflation, but this month certainly doesn't help.

N.Y. FED EMPIRE:

It didn't fall as much as the other regional data last month. It's another piece of softer manufacturing data. It's hard to determine whether it's transitory due to the Japanese supply-chain disruption. Auto supply production is scheduled to ramp up. Whether this is a more permanent deterioration, we just have to wait and see.

PAUL RADEKE, VICE PRESIDENT AT THE MINNEAPOLIS-BASED KDV WEALTH MANAGEMENT

People are becoming less accepting of the idea of Japan driving the slowdown in manufacturing, so the New York Fed number will create a very negative day. I assume people will look at this as another reason the recovery is stalling, giving more fodder to the double dip theory. However, other data has shown that the consumer remains on track, suggesting that eventually manufacturing will catch up. However, this data suggests that process will take longer.

SEAN INCREMONA, ECONOMIST, 4CAST LTD, NEW YORK

We have a split between prices and activity here, and the activity data is very disappointing. Empire is one of the first releases we have out that really shows that June is also starting out on a soft footing, so that's not good. Its showing that this soft spot might be more protracted than originally expected.

On the CPI front, its on the firm side of expectations. The core is strong so there is probably some support there from motor vehicles, which may be part of this supply shortage.

LINDSEY PIEGZA, ECONOMIST, FTN FINANCIAL, NEW YORK

Empire State is not looking very good. Not only did we plummet into negative territory, but excluding that one number we had in November '10 this is the lowest number since 2009. Of course, a good portion of this is from the supply disruptions from what is happening overseas in Japan but it will have an impact on auto sales, and on activity in the second half of the year.

It certainly is going to hurt what's going on over here in the domestic economy.

Bernanke has made it very clear that they've done everything they can do and now it's up to the Obama administration to encourage growth and get pro-small business policies in place.

We are in unprecedented territory, so we could see talk of additional stimulus in other directions but I don't think talk of QE3 is viable right now.

KATHY LIEN, DIRECTOR OF RESEARCH, GFT FOREX, NEW YORK

We're seeing a pretty muted reaction, probably because the hotter CPI numbers are being offset by the weak Empire State report. I'm not very worried about a mild rise in inflation but I am worried about jobs in the manufacturing sector. If the rest of the data is in line with expectations today, I'd expect the dollar to struggle on that.

DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS

ON CPI:

May CPI surprised on the upside with a 0.2% rise in the headline and more worryingly a 0.3% rise in the core rate ex food and energy, the strongest monthly rise in this series since July 2008. While some of the sectors lifting the core rate in May look erratic, the underlying trend continues to accelerate. Both the overall and core CPI increases were 0.1% ahead of market expectations...

Gasoline prices should fall further in June and the PPI breakdown suggests food prices are close to a peak too. Concerns over headline CPI should start to fade, but the latest data suggests no room for complacency on the core, even if erratic factors did play a part in the upside surprise.

VIMOMBI NSHOM, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS

NY FED

Whereas last month's report could have been explained as manufacturing conditions losing recovery momentum, today's report is more painting a picture of a halt in progress, which hopefully will prove brief.

MARKET REACTION: STOCKS: U.S. stock index futures extend losses. BONDS: U.S. bond prices cut early gains. FOREX: The dollar extends gains versus the euro.

Japan Inflation