The U.S. producer price index, a gauge of prices paid at the farm gate and factory door, declined by 0.2 percent last month after shooting up by 0.9 percent in May, the first decline since January.
But after stripping out volatile food and energy costs, core prices in June climbed 0.3 percent after gaining 0.2 percent in May. Gasoline prices dropped 3.9 percent, the biggest decline since a 13 percent plunge in January. That trend has since been reversed as crude oil has surged to 11 month highs in July and gasoline prices have rebounded.
Economists surveyed by Reuters had forecast that both overall producer prices and core prices would rise by 0.2 percent.
U.S industrial output rose by a slightly larger than expected 0.5 percent on a surge in the production of automobiles a Federal Reserve report showed on Tuesday.
Treasury bonds extended losses on inflation concerns after the PPI data, while the dollar held steady and U.S. stock index futures edged up.
"You got a higher core inflation number. If that's what the Fed tells us they are looking at, it is a data point we have to take seriously. I think the Treasury market sells off," said Jim Caron, co-head of global rates research with Morgan Stanley in New York.
Meanwhile, a more recent gauge of chain store sales activity from Redbook Research showed a rise in the latest week versus the same week year ago, hinting that a recent rebound in energy prices has not yet dented consumer spending.
Federal Reserve policy-makers have expressed caution about the potential for price pressures to flare up and Fed Chairman Ben Bernanke is expected to tell Congress in testimony later this week the Fed continues to be wary about inflation.
Against the backdrop of a weakening dollar, demand for U.S. assets remained strong in May, a report showed. Net overall capital inflows into the United States rose to $105.9 billion in May from April's revised inflow of $97.8 billion, more than sufficient to cover the U.S. trade deficit for the same month, the Treasury said on Tuesday.