Producer prices up on gasoline, core rate flat

U.S. producer prices rose more than expected in September as the cost of gasoline surged, but underlying inflation pressures were muted in a sign the U.S. Federal Reserve has room to carry out its new monetary stimulus program.

The Labor Department said on Friday its seasonally adjusted Producer Price Index increased 1.1 percent last month.

Economists polled by Reuters had expected prices at farms, factories and refineries to rise 0.7 percent after climbing 1.7 percent in August.

Despite the rise in overall wholesale prices last month, there is likely to be little pass-through to consumers given sluggish job growth, which puts a brake on inflation.

Wholesale prices excluding volatile food and energy were flat last month. That was the lowest reading since October 2011 and fell short of analysts' forecasts.

Consumer inflation is currently below the Federal Reserve's 2 percent target, and many economists think it will trend below that level for years to come.

In a bid to boost economic activity, the Fed launched an aggressive new stimulus program last month, pledging to buy $40 billion of mortgage-backed debt a month until the outlook for jobs improves substantially.

Overall producer prices last month were buoyed by a 4.7 percent increase in energy prices. Higher gasoline costs drove the increase. Wholesale diesel prices also contributed, rising 9.2 percent, the biggest one-month gain since December 2010.

"These kinds of energy prices are debilitating to the economy and it is one of the reasons why we haven't been able to get any kind of a glide speed above a 2 percent annual rate," said Cary Leahey, an economist at Decision Economics in New York.

Following the release of the data, prices for U.S. 30-year Treasuries hit a session high as traders bet the core price reading signaled a muted trend in inflation. U.S. stock futures were higher after robust earnings from JP Morgan.

Food prices rose 0.2 percent, backing off of the faster pace of price increases seen over the summer when a severe drought pushed up the cost of grain and soybeans.

In the 12 months to September, producer prices increased 2.1 percent, biggest gain since March, after advancing 2 percent in August.

Outside food and energy, producer prices were restrained by a decline in the cost of communication equipment.

Core producer prices increased 2.3 percent in the 12 months to September.

(Reporting by Jason Lange; Editing by Neil Stempleman)