Inflation concerns eased slightly as wholesale prices fell by the most in a year, as the Federal Reserve met to consider interest rate cuts.

Prices paid to producers fell more than expected, with a drop of 1.4 per cent compared with a decline of 0.6 per cent the previous month, the Labor Department said.

But core producer prices, which exclude fuel and food costs, rose 0.2 per cent, after a 0.1 per cent gain the month before.

Inflation has become less of a concern for Fed policymakers in recent weeks than the risks to economic growth as credit conditions have tightened and the housing market has deteriorated.

The central bank is widely expected to cut interest rates later on Tuesday.

Economists said short-term inflation trends appeared to give the Fed added flexibility to cut rates aggressively, as slower economic growth is expected to limit price increases for raw materials.

The annual rate of producer inflation was 2.2 per cent.

Prices for raw materials fell 3 per cent last month.

A drop in fuel prices helped ease cost pressures in August and contributed the surprisingly sharp drop in headline inflation, though core prices excluding fuel and food rose more than expected.

Energy costs fell by the most since 2003, with a fall of 6.6 per cent.

The price of consumer goods fell 1.8 per cent as food costs fell.

Prices for capital goods rose 0.1 per cent, following a period of improved business investment.

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