* Core producer prices fall 0.6 pct in October on autos
* Decline in core PPI largest since July 2006
* Headline PPI index rises 0.4 pct, below forecasts
* Industrial output flat in October; utilities drag
(Updates markets to close)
By Lucia Mutikani
WASHINGTON, Nov 16 Core U.S. producer prices
recorded their largest fall in more than four years in October
and industrial output was flat, underlining concerns at the
Federal Reserve about low inflation amid moderate growth.
Economists said the data supported the U.S. central bank's
Nov. 3 decision to ease monetary policy further even though the
0.6 percent drop in the core Producer Price Index largely
reflected the annual introduction of new motor vehicle models.
Stripping out the sharp declines in vehicle prices, core
producer prices -- which exclude volatile food and energy costs
-- would have risen by 0.2 percent, the Labor Department said
on Tuesday, a modest gain consistent with the economy's
sluggish growth trend and tepid domestic demand.
"Today's PPI data shows you that beneath the surface there
is not a whole lot of inflation and tomorrow's (consumer price)
data is likely to show the same thing," said John Canally, a
economist at LPL Financial in Boston.
"The Fed is not going to be proven right with one month of
inflation data, but you just need to look around where wage
costs are. The PPI data supports what the Fed is doing."
The overall decline in the core index was the biggest since
July 2006 and followed a 0.1 percent gain in September. A
similar increased had been expected in October.
Graphic on producer prices: r.reuters.com/caw65q
The weak inflation report ignited a rally on the U.S.
government debt market, where the the 30-year bond posted its
biggest one-day gain. Ongoing concerns over Ireland's debt
crisis and tight credit in China eroded risk appetite.
U.S. stock indices ended down more than 1.5 percent, while
the dollar scaled a seven-week high against the euro.
Concerns that low inflation could spiral into a damaging
phase of deflation prompted the U.S. central bank this month to
ease monetary policy further, a step that will see it buy $600
billion worth of government bonds through the middle of 2011.
That measure has been criticized by some economists, amid
signs that the recovery from the worst economic downturn since
the 1930s is regaining some strength after losing momentum in
Despite brighter signs, soft demand is forcing retailers to
continue with price discounting to lure customers.
Wal-Mart Stores Inc (WMT.N), the world's largest retailer,
said on Tuesday there were indications consumers were still
shopping paycheck-to-paycheck. Still, cost cutting helped it to
a higher quarterly profit. [ID:nN1691422]
Home improvement chain Home Depot Inc (HD.N) also reported
earnings that beat expectations, but it softened its full-year
sales forecast [ID:nN1627318].
A separate report from the Fed showed industrial production
was flat last month, short of economists' expectations for a
rise of 0.3 percent, largely because of weak utility output
that reflected unusually warm weather. But manufacturing
production rose 0.5 percent, its biggest gain since July.
"The rise in manufacturing is consistent with other reports
out there showing the economy picked up strength at the start
of the fourth quarter," said Jim O'Sullivan, chief economist at
MF Global in New York.
Economists do not expect the distortions from the annual
introduction of new vehicle models to spill over into data on
consumer inflation, which is due on Wednesday. Core consumer
prices are expected to have edged up 0.1 percent after being
flat in September.
The core PPI was depressed by a 4.3 percent drop in the
price of light motor trucks and a 3 percent drop in prices for
passenger cars. In the 12 months to October, core prices have
risen just 1.5 percent.
While core prices fell sharply, overall prices received by
U.S. farms, factories and refineries rose 0.4 percent, but that
was well below economists' expectations for a 0.8 percent gain.
Wholesale prices increased 0.4 percent in September.
Though upward pressure from rising commodity prices is
starting to show, economists said it was unlikely to feed
through to consumer prices in a meaningful way.
"It is not true to say that no cost increases are filtering
through, but there's still so much excess capacity in the
economy that core inflation will remain quiet despite higher
costs," said Nigel Gault, chief U.S. economist at IHS Global
Insight in Lexington, Massachusetts.
(Additional reporting by Emily Kaiser in Washington; Editing
by Andrea Ricci)