By Lucia Mutikani
WASHINGTON (Reuters) - U.S. producer prices were unchanged in May as energy costs recorded their biggest decline in more than a year, suggesting a moderation in inflation after a rise at the start of the year.
Inflation at the factory gate, however, remains supported by sustained increases in the cost of services as well as a softening dollar, which is lifting prices of some imported goods.
"Inflation down at the producer level of the economy's factory-to-consumer supply chain remains on the warm side, which is in keeping with the economy moving beyond full employment," said Chris Rupkey, chief economist at MUFG in New York.
The Labor Department said on Tuesday that last month's unchanged reading in its producer price index for final demand followed a 0.5 percent jump in April.
In the 12 months through May the PPI increased 2.4 percent, retreating from April's 2.5 percent surge, which was the biggest yearly increase since February 2012. Last month's inflation readings were broadly in line with economists' expectations.
A key gauge of underlying producer price pressures that excludes food, energy and trade services fell 0.1 percent last month, the first decline in a year. The so-called core PPI rose 0.7 percent in April. The core PPI increased 2.1 percent in the 12 months through May after a similar gain in April.
Federal Reserve officials were scheduled to start a two-day policy meeting later on Tuesday. The U.S. central bank is expected to raise interest rates on Wednesday and offer details on plans to trim its $4.5 trillion balance sheet.
The Fed has a 2 percent inflation target and tracks a measure that is currently at 1.5 percent. It raised its benchmark overnight interest rate by 25 basis points in March.
Economists believe further monetary policy tightening this year will hinge on the inflation outlook.
ENERGY PRICES FALL
Prices of U.S. government debt were trading lower on Tuesday, while the dollar (DXY) slipped against a basket of currencies. U.S. stocks rose, with the Dow Jones Industrial Average (DJI) hitting a record intraday high as bank stocks advanced in anticipation of a rate hike.
Energy prices fell 3.0 percent last month, the biggest drop since February 2016, after rising 0.8 percent in April. The cost of gasoline declined 11.2 percent in May, which was also the largest decline since February of last year.
As a result, the cost of goods fell 0.5 percent, reversing April's 0.5 percent increase.
But prices for services rose 0.3 percent last month, driven by a 1.1 percent surge in the index for final demand trade services, which measures changes in margins received by wholesalers and retailers.
Services increased 2.1 percent in the 12 months through May, the largest gain since December 2014.
Food costs fell 0.2 percent as the prices of fresh fruits and melons recorded their biggest drop since June 2010. But the cost of beef and veal increased by the most since July 2008. Food prices surged 0.9 percent in April.
The cost of healthcare services fell 0.1 percent last month after being unchanged in April. Those costs feed into the Fed's preferred inflation measure, the core personal consumption expenditures price index.