U.S. producer prices were unchanged in May as energy costs recorded their biggest decline in more than a year, suggesting inflation pressures were easing after rising at the start of the year.

Signs of abating inflation came as Federal Reserve officials prepared to gather for a two-day policy meeting on Tuesday. The U.S. central bank is expected to raise interest rates at the end of the meeting on Wednesday, but weakening inflation could limit the scope for further monetary policy tightening this year.

The Labor Department said last month's unchanged reading in its producer price index for final demand followed a 0.5 percent jump in April. In the 12 months through May the PPI increased 2.4 percent, retreating from April's 2.5 percent surge, which was the biggest yearly increase since February 2012.

Last month's inflation readings were broadly in line with economists' expectations.

Prices of U.S. government debt fell after the data. U.S. stock index futures were slightly stronger while the dollar .DXY was weaker against a basket of currencies.

The Fed has a 2 percent inflation target and tracks a measure that is currently at 1.5 percent. The central bank raised its benchmark overnight interest rate by 25 basis points in March.

The dollar's fading rally and rising oil prices boosted producer prices at the start of the year. But oil prices have retreated in recent weeks, putting a lid on producer inflation.

Energy prices fell 3.0 percent last month, the biggest drop since February 2016, after rising 0.8 percent in April. The cost of gasoline declined 11.2 percent in May, which was also the largest drop since February of last year.

As a result of weak energy prices, the cost of goods fell 0.5 percent, reversing April's 0.5 percent increase.



But prices for services rose 0.3 percent last month, driven by a 1.1 percent surge in the index for final demand trade services, which measures changes in margins received by wholesalers and retailers. Services rose 0.4 percent in April.

Half of the increase in services last month was driven by margins for fuels and lubricants retailing, which rose 16.1 percent. There were also increases in margins for apparel retailing, machinery and equipment wholesaling and automobiles and parts retailing.

However, the cost of renting a guest room fell a record 5.2 percent. Food prices fell 0.2 percent as prices of fresh fruits and melons recorded their biggest drop since June 2010. But the cost of beef and veal increased by the most since July 2008.

Food prices surged 0.9 percent in April.

A key gauge of underlying producer price pressures that excludes food, energy and trade services fell 0.1 percent last month, the first decline in a year. The so-called core PPI rose 0.7 percent in April.

The core PPI increased 2.1 percent in the 12 months through May after a similar gain in April.

The cost of healthcare services fell 0.1 percent last month after being unchanged in April. The cost of inpatient healthcare services dropped 0.2 percent last month after a similar decrease in April.

Outpatient care prices rose 0.2 percent, while physician care edged up 0.1 percent. Those costs feed into the Fed's preferred inflation measure, the core personal consumption expenditures price index. 

By Lucia Mutikani - Reuters (Editing by Paul Simao)