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U.S. producer prices plummet 1% in May

WASHINGTON (MarketWatch) -- Lower costs energy and food pulled the U.S. producer price index down 1.0% in May, the Labor Department reported Wednesday, in the biggest one-month drop in close to three years.

The results were close to economist expectations. Analysts surveyed by MarketWatch had predicted a fall of 0.9% for the month. Read comprehensive MarketWatch calendar.

Core producer prices, excluding volatile food and energy, rose 0.2% -- matching analysts' expectations. More expensive drug prices pushed up the index, the government said.

The May decline in the PPI was the largest since a drop of 1.2% in July 2009, just when the recession was ending.

This is the second straight monthly decline in wholesale prices. In April, the headline PPI rate had fallen 0.2%, while the core rate had risen 0.2%.

Many Federal Reserve officials have said that they expect inflation to stay near their 2% annual target in coming months. Inflation concerns have eased along with falling crude oil prices and a weaker global economic environment.

"With global economic growth sluggish at best and spare capacity generally abundant, we foresee little impetus for significant, sustained upside pressure on prices at the producer level," said Josh Shapiro, chief U.S. economist at MFR Inc.

Economists are debating whether the Fed will engineer another round of quantitative easing to help stimulate the economy.

The Fed meeting next week is expected to be contentious with some officials arguing for more action while others think the central bank has done enough.

"If the Fed decides that the downside risks to growth are significant enough to warrant more accommodation, inflation will not likely be a limiting factor in their decision making process," said Thomas Simons, an economist at Jefferies.

In other data Tuesday, Commerce Department said retail sales fell for the second month in a row in May. Read how gasoline undercut May sales.

U.S. stocks (DJIA) opened lower. Treasury prices (10_YEAR) turned up slightly after the reports of slower spending and less inflation pressure.

In the 12 months ending in May, producer prices gained 0.7%. This is the lowest annual gain since October 2009. The annual rate of inflation soared to 7.1% last July but has moved steadily down in recent months.

Minus food and energy, those prices have climbed 2.7%. This is down slightly from a reading over 3% at the beginning of the year.

Energy prices fell 4.3% at the wholesale level in May, the data show. This was the biggest drop since July 2009.

Gasoline prices fell 8.9% in May while residential natural gas fell 2.5%. Partially offsetting these declines was a 1.5% gain in home heating oil.

Wholesale food prices in May fell 0.6%. Prices for fresh fruit fell 7.1% while meat prices declined 2.2%.

Prices were also down further back on the supply pipeline.

Prices for intermediate goods fell 0.8% in May, as energy goods lost 3.3%. Excluding food and energy, prices for intermediate goods fell 0.2%.

Prices for crude goods declined 3.2% as crude energy materials fell 5%. Crude nonfood materials less energy prices fell 1.3% during the month.