Prices paid to US producers fell in July at the fastest pace in nearly eight years, the US government said today.
The sharp decline was led by huge falls in energy prices, added credence to the argument that US inflation is under control.
The Producer Price Index (PPI), a closely watched gauge of wholesale inflation, tumbled 0.9 per cent last month after falling 0.4 per cent in June, the US labour department said.
It was the biggest drop in the PPI since a 1 per cent decline in August 1993 and was led by the largest decrease in energy prices in nearly 12 years.
The tame inflation figures should help ease inflation concerns for the Federal Reserve as it heads into its policy-setting Federal Open Market Committee meeting on August 21st, economists said.
The Fed is widely expected to cut rates for the seventh time this year, this time by a quarter-percentage point with and modest inflation giving it space to cut rates without igniting price pressures.
"This report certainly plays into an easing scenario. This gives the Federal Reserve room to cut rates however it sees fit this month," Ms Carol Stone, deputy chief economist at Nomura Securities International in New York said, adding that she expects a quarter-percentage-point reduction at the meeting.
US petrol prices plunged 17.7 per cent in July, the biggest drop in 15 years, the government said.
Food prices fell 0.6 per cent in July as declines in prices for beef, chicken and fresh fruits and vegetables more than offset a rise in pork prices. The decline in July followed a 0.1 per cent gain in June and was the largest since April 1999.
Car prices fell 0.3 percent in July, the biggest decline since February, after rising 0.1 percent in the previous month.
The central bank has cut rates by 2.75 percentage points in total this year to try to jump-start the stalled economy. The key fed funds rate, which affects borrowing costs across the economy from credit cards to car loans, is now 3.75 per cent, its lowest level in seven years.
On a gloomier note, the PPI report did not bode well for the producers themselves, suggesting their profits are continuing to take a hit as the deep US economic slowdown lingers.
"While great for the inflation outlook, this contributes to profit difficulties," FleetBoston Financial senior economist Mr Geoffrey Somes wrote in a recent economic commentary.