WASHINGTON, July 15 (Reuters) - U.S. producer prices unexpectedly fell in June, another indication that inflation was retreating before the recent escalation in the Middle East conflict.

The Producer Price Index for final demand dropped 0.3% last month after a downwardly revised 0.6% increase in May, the Labor Department's Bureau of Labor Statistics said on Wednesday. Economists polled by Reuters had forecast the PPI unchanged after a previously reported 1.1% advance in May.

In the 12 months through June, the PPI increased 5.5% after rising 6.0% in May.

A 1.4% decline in goods prices, the largest since July 2022, accounted for the decrease in the PPI over the month. Goods prices were weighed down by a 6.4% drop in the cost of energy products. Wholesale food prices fell 0.6%. Prices for services rose 0.2%. 

The ceasefire between the United States and Iran collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran. Oil prices rose to a four-week high after Washington reimposed a naval blockade of Iran. 

The government reported on Tuesday that the Consumer Price Index dropped 0.4% in June, the largest decline since April 2020, after increasing 0.5% in May. The decrease, which mostly reflected a decline in energy prices, slowed the annual increase in consumer inflation to 3.5% from 4.2% in May.

The Federal Reserve tracks the Personal Consumption Expenditures Price Indexes for its 2% inflation target. 

Prior to the PPI data, economists estimated that PCE inflation excluding the volatile food and energy components rose 0.2% in June after climbing 0.3% in May. That would translate into a 3.3% year-on-year increase in the so-called core PCE inflation after rising 3.4% in May.

Financial markets expected the U.S. central bank to keep its benchmark overnight interest rate unchanged in the 3.50%-3.75% range this month. Traders, however, continued to see a rate hike in September. Inflation was last below 2% in early 2021. Fed Chair Kevin Warsh told lawmakers on Tuesday that the central bank had "no tolerance for persistently elevated inflation."