U.S. producer prices (search) surged 0.6 percent last month as energy costs soared, but underlying inflation held steady as food prices fell, the government said on Tuesday in a report unaffected by Hurricane Katrina.

A separate report showed the U.S. trade deficit (search) narrowed unexpectedly in July as exports hit a record high and a drop in imports of consumer goods and big-ticket items like civilian aircraft more than offset a record oil import bill.

The producer price index, a gauge of prices received by farms, factories and refineries, showed inflation pressures were somewhat less than feared on Wall Street. Economists had forecast a 0.8 percent rise in overall producer prices and a 0.1 percent increase in costs outside of food and energy.

Prices for U.S. government bonds moved higher on the tamer-than-expected producer price data, which came a week before Federal Reserve (search) officials meet to consider raising interest rates. The dollar posted gains on the slimmer trade gap.

"Inflation is very contained; it's not going anywhere," said Robert Brusca, chief economist at Fact and Opinion Economics in New York.

Energy prices climbed 3.7 percent in August, the Labor Department (search) said, reflecting oil prices that had already reached record highs before the devastating hurricane slammed into the U.S. Gulf Coast. Oil prices hit fresh highs in the days after the storm but have since retreated to pre-Katrina levels.

The department noted the data were based on prices in the middle of the month. Katrina did not hit the Gulf Coast until August 29.

Food prices dropped 0.3 percent in August for the second consecutive month, but economists warn they are likely to move higher in September as imports hit a bottleneck due to damage to the Port of New Orleans.

The report underscored the intensified inflation pressures stemming from lofty energy prices that had already been troubling policy-makers at the Fed before the hurricane struck.

Fed officials gather in a week to consider interest-rate policy and markets had begun to speculate the central bank could pause in a rate-rise campaign begun in June 2004.

However, comments from Fed officials suggest they are likely to bump overnight rates up a further quarter-percentage point to 3.75 percent next Tuesday as they seek to prevent soaring energy prices from igniting a broader inflation.

The rise in energy prices reflected a 9.5 percent spike in gasoline costs, a 10.7 percent gain in the price of liquefied petroleum gas and a 2.5 percent increase in natural gas costs.

Car prices, which had shot up in July, fell 1.3 percent last month, but the cost of light trucks move up 0.5 percent.

Separately, the Commerce Departmentsaid the U.S. trade gap totaled $57.9 billion in July, down 2.6 percent from an upwardly revised $59.5 billion in June, the second highest on record. The July deficit was below the $59.8 billion consensus Wall Street forecast.

U.S. exports edged up in July to a record $106.2 billion, despite a gradual strengthening of the dollar that many analysts expected to be a drag on American competitiveness in world markets.

Exports of industrial supplies and materials — led by big increases in shipments of cotton and steelmaking products — also set a record and exports of consumer goods were the second highest ever.

Meanwhile, imports of capital goods such as civilian aircraft, drilling and oilfield equipment and computers took a big drop in July, as did imports of consumer goods like pharmaceuticals and clothing.

Those declines pushed overall imports slightly lower in July. But crude oil imports hit a record $15.3 billion, pushed up by import prices that averaged a record $49.03 per barrel.

The U.S. trade deficit in all petroleum products was a record $18.5 billion in July. With crude oil prices now over $60 per barrel, that shortfall is expected to grow — widening the overall trade gap, analysts said.

In addition, the effects of Hurricane Katrina on U.S. trade through critical Gulf of Mexico ports will not show up until the September data is issued in mid-November.

The politically sensitive trade deficit with China set another new record in July at $17.7 billion. The United States imported a record $21.3 billion from China that month, easily swamping record U.S. exports of $3.6 billion to the Asian giant.