Producer Prices Drop Unexpectedly in August

U.S. producer prices (search) dropped unexpectedly last month as energy price gains eased and the cost of food and vehicles fell, according to a government report on Friday that showed inflation (search) pressures fading.

The producer price index, a gauge of prices received by farms, factories and refineries, fell 0.1 percent in August, the Labor Department (search) said. The so-called core index, which excludes volatile food and energy prices, also dropped 0.1 percent — the first decline since February.

Private economists had looked for both overall and core prices to gain 0.1 percent.

Over the last 12 months, producer prices are up 3.4 percent, a sharp slowdown from the gains seen in the past few months, suggesting the impact of this year's run-up in oil prices is fading.

Energy prices, which had shot up 2.3 percent in July, inched ahead just 0.2 percent last month as a 5 percent plunge in gasoline prices partially offset rising costs for many other energy products.

Food prices dropped 0.2 percent in August, the third consecutive monthly decline after a string of sharp rises in the spring.

The report also showed a 1.2 percent decline in car prices and a sharp 2.5 percent fall in prices received for light trucks and SUVs. Many economists had expected vehicle prices to drop as automaker sales incentives eased.

Further back in the production pipeline, prices gauges were mixed. Intermediate goods prices rose 1.0 percent, while prices for crude goods dropped 0.7 percent.

This year's rise in oil prices, which hit a record high at just under $50 a barrel last month, does not yet appear to have sparked a more widespread pickup in consumer prices.

"Despite the rise in oil prices through mid-August, inflation and inflation expectations have eased in recent months," Federal Reserve Chairman Alan Greenspan (search) told Congress earlier this week.

Nevertheless, Fed officials are widely expected to raise interest rates a quarter-percentage point when they meet on Sept. 21, taking the benchmark federal funds rate up to 1.75 percent.