Producer prices post biggest drop in 10 months

Producer prices recorded their biggest drop in 10 months in March as the cost of gasoline tumbled, according to a government report on Friday that supported the case for the Federal Reserve to maintain its very accommodative monetary policy.

The Labor Department said its seasonally adjusted producer price index fell 0.6 percent last month, the largest drop since May, after increasing 0.7 percent in February.

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Economists polled by Reuters had expected prices received by the nation's farms, factories and refineries to fall only 0.2 percent.

In the 12 months through March, wholesale prices were up 1.1 percent, the smallest rise since July. Prices had increased 1.7 percent in February.

Underlying inflation pressures also were muted, with wholesale prices excluding volatile food and energy costs rising 0.2 percent for a third straight month.

In the 12 months through March, the so-called core PPI increased 1.7 percent after rising by a similar margin in February.

The benign inflation environment could strengthen the argument for the Fed to keep monetary policy expansionary as it tries to steer the economy towards faster growth, despite divisions among policymakers over continued asset purchases.

Minutes of the Fed's March 19-20 meeting released on Wednesday showed the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and spur faster job growth.

In March, energy prices fell 3.4 percent - the largest drop since February 2010. A 6.8 percent drop in gasoline prices accounted for more than 80 percent of the fall in the wholesale energy price index. Gasoline had risen 7.2 percent in February.

Food prices increased 0.8 percent, more than reversing February's 0.5 percent fall.

A 0.7 percent increase in prices for civilian aircraft accounted for almost a quarter of the rise in core PPI last month. Elsewhere, passenger car prices rose 0.2 percent, while light truck prices were flat.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)