Producers prices fall more than expected in June

The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate dropped 0.5 percent after slipping 0.3 percent in May.

Analysts polled by Reuters had expected producer prices to dip 0.1 percent last month.

In the 12 months to June, producer prices increased 2.8 percent after rising 5.3 percent in May. The year-on-year increase in June was the smallest gain since November and was below market expectations for a 3.1 percent rise.

Last month, energy prices fell 0.5 percent after declining 1.5 percent in May. Gasoline prices dropped 1.6 percent, while food costs tumbled 2.2 percent - the largest decline since April 2002.

Stripping out volatile food and energy costs, core producer prices edged up 0.1 percent last month, matching expectations, after increasing 0.2 percent in May.

A combination of weak energy prices and low rates of resource utilization are keeping inflation subdued as the economy struggles to recover from the most brutal recession since the 1930s.

With domestic demand retreating and unemployment still stubbornly high, many economists do not expect the Fed to lift overnight interest rates, currently near zero, until at least the second half of next year.

Last month, core PPI was lifted by a 2.5 percent surge in the cost of heavy motor trucks, which was the largest increase since April 2007, the Labor Department said.

In the 12 months to June, the core producer price index rose 1.1 percent, in line with market expectations, following a 1.3 percent increase in May.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)