The Commerce Department reported last week that the nation’s trade deficit narrowed in July as a record amount of U.S. goods and services were sold overseas.

The trade deficit, expected to increase by about 3 percent, instead shrank by 2.6 percent to $57.9 billion. Economists had noted slight hints indicating this turn-around. The effects of Hurricane Katrina were not included in this report although experts maintain that these effects will be seen later in the year starting in the September report.

The trade gap totaled $404.3 billion over the first seven months of 2005, an increase over the $342.2 billion in the same period last year. The annual trade deficit was $617.6 billion in 2004.

July exports increased to $74.9 billion specifically helped by cotton, semiconductors, and civilian aircraft by 0.5 percent. Declining imports of consumer goods and capital goods helped July imports decrease by 0.6 percent to $137.5 billion. The Commerce Department excluded autos in calculating these values.

Our country’s trade deficit with China increased 19 percent over the same period last year also. Record trade deficits were also reported with the European Union, Germany, and OPEC. Of particular importance to all, U.S. oil imports were $14.6 billion in June and rose to a high of $15.3 billion in July. Energy prices rose 4.4 percent in July and another 3.7 percent in August. The year total increase for energy prices is 19.2% for 2005 so far.

Other metrics reported by the Department of Labor are showing slightly positive performance also although not taking the effects of Hurricane Katrina into consideration. The Producer Price Index (PPI) rose 0.6 percent with higher energy costs. Core remained almost unchanged at 0.1 percent in July. A 0.5% rise is expected in the August Consumer Price Index (CPI) that improved due to a 1.3 percent fall in August auto prices.

“Inflationary pressures were solidly mounting before the storm, and are likely to be even more strongly exacerbated in the September producer price data,” said Jason Schenker, an economist at Wachovia speaking with MarketWatch. Analysts are expecting the Federal Reserve to increase the federal funds rate to 3.75% in their next policy meeting to head off any inflationary pressures that will likely continue with expected rises in the PPI.

Speaking with MarketWatch, Stephen Stanley, chief economist for RBS Greenwich Capital said, “The key question, as has been the case all through this cycle, is whether higher production costs get passed along to the consumer. For that, we will have to focus not on the PPI, but the CPI.”