By Lucia Mutikani
U.S. producer prices recorded their largest drop in three years in April as gasoline and food costs tumbled, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative.
The Labor Department said Wednesday its seasonally adjusted producer price index fell 0.7 percent last month, the biggest decline since February 2010. Wholesale prices had dropped 0.6 percent in March.
A Reuters survey of economists had forecast prices received by the nation's farms, factories and refineries dropping 0.6 percent last month.
In the 12 months through April, wholesale prices were up only 0.6 percent, the smallest increase since July last year. Prices had increased 1.1 percent in March. Underscoring the tame inflation environment, wholesale prices excluding volatile food and energy costs nudged up 0.1 percent, the smallest increase since November.
The so-called core PPI had risen 0.2 percent in each of the previous four months. In the 12 months through April, core PPI advanced 1.7 percent after rising by the same margin in March.
"With previous falls in some commodity prices still to feed through, a further fall in producer price inflation is on the cards, said Paul Dales, senior U.S. economist at Capital Economics in London.
"This is especially the case when the weak activity climate is preventing producers from raising margins," he said.
The report was the latest suggestion that disinflation was starting to creep in against the backdrop of lackluster domestic and global demand.
Consumer inflation was muted in March, with a measure closely watched by the Fed slowing sharply below its 2 percent target during the 12-month period. With little sign of pipeline price pressures, consumer inflation should remain low this year.
That should give the U.S. central bank room to maintain its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and speed up job growth.
Weak domestic and global demand are hurting the nation's factories. A second report showed manufacturing activity in New York state unexpectedly contracted in May as new orders and shipments of finished goods fell.
The New York Federal Reserve's "Empire State" general business conditions index fell to minus 1.43 this month from 3.05 in April. Economists had expected the index to rise to 4.
U.S. Treasury debt prices rallied on the reports, while the dollar trimmed gains versus the euro and the yen.
Last month, wholesale gasoline prices fell 6.0 percent after dropping 6.8 percent the prior month. That drop helped to push wholesale energy prices down 2.5 percent.
Weak energy prices accounted for over 80 percent of the drop in wholesale prices last month.
Producer prices were also dampened by a 0.8 percent decline in food prices, the largest fall since May 2011. Food prices were held down by a collapse in the wholesales prices of strawberries, eggs and fresh and dry vegetables.
Away from food and gasoline, passenger car prices slipped 0.2 percent, while light truck prices dipped 0.1 percent.