Producer prices post biggest drop in 7 months

A worker harvests soybeans at a farm north of Birmingham, Alabama November 13, 2009.

WASHINGTON (Reuters) - Producer prices fell more steeply than expected in February, posting their biggest drop in seven months as energy costs tumbled, according to a government report on Wednesday that pointed to scant inflation pressures.

The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate fell 0.6 percent, the largest decline since July, following a 1.4 percent rise in January.

Analysts polled by Reuters had expected producer prices to fall 0.2 percent last month. Compared to February last year, producer prices increased 4.4 percent, but slowing from a 4.6 percent rise in January. It was below market expectations for a 4.9 percent increase.

The report came a day after the Federal Reserve renewed its promise to hold benchmark interest rates exceptionally low for an extended period, arguing that substantial resource slack would likely keep inflation subdued for some time. It left overnight interest rates in a range of zero to 0.25 percent.

The Labor Department attributed the February decline in wholesale prices to a 2.9 percent drop in energy costs, which was also the largest decline in seven months and represented a sharp reversal from January, when energy costs surged 5.1 percent.

Gasoline prices plummeted 7.4 percent after an 11.5 percent rise in January. Food prices rose 0.4 percent after rising by the same margin in January.

Stripping out volatile food and energy costs, core producer prices edged up 0.1 percent last month, slowing from January's 0.3 percent increase. The core index had been forecast to rise 0.1 percent in February.

Core prices last month were lifted by a 0.5 percent rise in the index for passenger cars. It was the largest increase since June. The core producer price index rose 1.0 percent measured on a year-on-year basis, in line with market expectations and following a 1.0 percent rise in January.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)