* Producer Price Index falls 0.3% in June, confounding

economists' expectations for an unchanged reading

* Declines in energy and food prices account for drop in

monthly producer prices

* Producer inflation increases 5.5% year-on-year

By Lucia Mutikani

WASHINGTON, July 15 (Reuters) - U.S. producer prices

unexpectedly fell in June, posting their biggest decline in 14

months amid a pullback in the cost of energy products, further

evidence that inflation was easing before the recent escalation

in the Middle East conflict.

The report from the Labor Department on Wednesday followed

on the heels of news on Tuesday of a larger-than-expected drop

in the monthly Consumer Price Index last month. The data,

together with a moderation in job growth in June, effectively

ruled out an interest rate increase from the Federal Reserve

this month.

The reports have, however, been overtaken by the renewed

hostilities between the United States and Iran following last

week's collapse of a fragile ceasefire. Oil prices have risen to

a four-week high after Washington reimposed a naval blockade of

Iran. The Producer Price Index report also showed more price

increases related to the artificial intelligence build-out, a

concern for officials at the U.S. central bank. These factors

keep a rate hike this year on the table, economists said.

"There's no near-term pressure on the Fed, but oil is in the

driver's seat over the longer term," said David Russell, global

head of market strategy at TradeStation. "Energy saved the day

in June, but that might become ancient history if the Strait of

Hormuz doesn't open soon."

The Producer Price Index for final demand dropped 0.3% last

month, the biggest decline since April 2025, after a downwardly

revised 0.6% increase in May, the Labor Department's Bureau of

Labor Statistics said. Economists polled by Reuters had forecast

the PPI unchanged after a previously reported 1.1% gain 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 increased 2.3% in May. They were in June

weighed down by a 6.4% drop in the cost of energy products,

which followed an 8.4% jump in May. Gasoline prices tumbled 12%,

accounting for nearly two-thirds of the drop in goods prices.

The cost of natural gas decreased 6.4%, but residential

electricity prices rose 0.7%. There were also decreases in the

prices of crude petroleum as well as thermoplastic resins and

materials. The ceasefire between the U.S. and Iran collapsed

last week after commercial tankers came under fire in the Strait

of Hormuz, a vital route for global oil supplies, that has

become ​one of the main battlegrounds of the conflict.

BROAD DECLINE IN FOOD PRICES

Wholesale food prices fell 0.6%, with the cost of fresh

fruits and melons declining 2.2%. Fresh and dried vegetable

prices dropped 6.0%, while the cost of grains plunged 12.0%.

There were also decreases in the prices of eggs, oil seeds,

beef, pork and poultry.

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

Chairman Kevin Warsh told lawmakers on Tuesday that the central

bank had "no tolerance for persistently elevated inflation."

U.S. stocks opened higher. The dollar was steady against a

basket of currencies. U.S. Treasury yields were little changed.

Excluding food and energy, the core goods PPI gained 0.2%

after increasing 0.7% for two straight months. Despite the

moderation in the so-called core goods inflation, there were

further AI-related price increases, with the cost of electronic

computers and computing equipment surging 2.5% during the month.

The cost of wholesale services rebounded 0.2% after dipping

0.1% in May. A 0.4% increase in trade services, which measures

margins received by wholesalers and retailers, accounted for

more than 60% of the rise in services. There were also increases

in prices for furniture retailing, apparel, jewelry, footwear

and accessories retailing as well as loan services and hospital

inpatient care. Prices for securities brokerage, dealing and

investment advice were up, with portfolio management fees rising

0.5%.

But airline fares fell 0.4%, while hotel and motel room

prices dropped 1.0%. They are among some of the components that

go into the calculation of the Personal Consumption Expenditures

Price Indexes, tracked by the Fed for its 2% inflation target.

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.

With the PPI and CPI data in hand, economists estimated that

core PCE inflation rose 0.2% in June after climbing 0.3% in May.

That would translate into a 3.3% year-on-year increase in core

PCE inflation after rising 3.4% in May.

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