Producer prices post biggest drop in 7 months

The Labor Department on Wednesday said the index for prices paid at the farm and factory gate fell 0.6 percent, the largest decline since July, after increasing 1.4 percent in January.

Even excluding volatile energy and food costs, core producer prices rose just 0.1 percent last month.

"The bottom line is it looks like the price pressures are pretty moderate in terms of core producer prices right now. It doesn't suggest there is any kind of generalized inflationary pressures building up in the production pipeline," said Jonathan Basile, an economist at Credit Suisse in New York.

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 they slowed from a 4.6 percent year-on-year rise in January and were below market expectations for a 4.9 percent increase.

Stocks opened firmer after the report, while Treasury debt prices added small gains. The U.S. dollar was little changed against major currencies.

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 rates in a range of zero to 0.25 percent.

The unemployment rate stands at 9.7 percent and is likely to remain elevated for some time, which suggests inflation will stay low. Labor costs are typically the biggest single business expense, so as long as they remain weak, price pressures probably will not build significantly.

The Labor Department attributed the February fall 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.

However, oil prices have been creeping higher in recent weeks, climbing to more than $82 per barrel on Wednesday. The price dipped below $70 a barrel as recently as February 5. That suggests overall inflation is probably headed higher soon.

Core producer prices, which exclude energy and food costs, 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 similar rise in January.

On Thursday, a report on consumer prices is expected to show a similar pattern of tame inflation. Economists polled by Reuters were expecting a 0.1 percent rise in February's CPI, both overall and excluding food and energy.

Separately, applications for home loans fell last week despite the lowest mortgage rates in more than three months, the Mortgage Bankers Association said.

The industry group's market index, which includes purchase and refinance applications, dropped 1.9 percent to a three-week low despite improving borrowing costs.

Average 30-year mortgage rates slipped 0.10 percentage point to 4.91 percent in a steady descent from a recent peak of 5.18 percent at the turn of the year. Rates have not been lower since early December.

(Reporting by Lucia Mutikani; Additional reporting by Lynn Adler and Ellen Freilich in New York; Editing by James Dalgleish)