Aug. 15 (Bloomberg) -- Prices paid to U.S. producers excluding food and energy unexpectedly fell in July, the first piece of evidence backing the Federal Reserve's forecast that inflation will slow.

The so-called core rate dropped 0.3 percent, the first decrease since October, the Labor Department said today in Washington. None of the 60 economists surveyed by Bloomberg News forecast a decline. Overall prices gained 0.1 percent.

Bonds and stocks jumped and the dollar sagged as traders seized on the report to speculate that the Fed may keep interest rates stable at its September meeting after ending a two-year tightening campaign last week. Investors' attention will now focus on tomorrow's consumer-price report; another less-than- expected reading would be a further sign Chairman Ben S. Bernanke was right in advocating a pause.

``The numbers buy Bernanke some time,'' said Chris Low, chief economist at FTN Financial in New York. ``The criticism of the Fed has been that the economy was slowing but inflation was picking up, and Bernanke has been saying that inflation works with a lag.''

Price declines last month were led by new cars, computers and men's clothing, the Labor Department said. The index measures prices paid to factories, farmers and other producers.

Housing Slump

In a sign of softening economic growth, confidence among U.S. homebuilders slid to a 15-year low this month as buyers cancelled orders and the supply of unsold dwellings increased. The National Association of Home Builders/Wells Fargo index of builder confidence fell to 32 from 39 in July, the Washington- based association said today.

Today's figures prompted economists to cut forecasts for the consumer-price report, the broadest measure of inflation because it includes the cost of services as well as goods.

``The Fed exposed itself to some risk if the numbers don't cooperate, and today's report diminishes that risk a bit,'' Jan Hatzius, chief U.S. economist at Goldman in New York. A low consumer price number tomorrow ``would definitely help make the case for the Fed and be very welcome.''

Goldman now projects retail prices rose 0.4 percent last month, down from a previous forecast of 0.6 percent. Core prices probably rose 0.2 percent, rather than the 0.3 percent expected earlier.

Trimming Forecasts

Core prices probably rose 0.2 percent in July from a month earlier, according to the median forecast of economists in a Bloomberg News survey. Prior to the producer price figures, the median estimate was for a 0.3 percent increase.

The cost or services makes up 59 percent of total consumer prices. Lower wholesale prices, as they work their way through the economy, may help limit increases at the retail level in coming months.

Today's report ``certainly weakens the view that the Fed has fallen woefully behind the curve, and reinforces the Fed's decision,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland. Still, ``it's much too soon to assign any kind of triumph over rising inflation.''

Price pressures for raw materials continue to build. Core prices for goods at the earliest stage of the production process rose at an annual rate of 43 percent over the last three months. Core prices for intermediate goods rose at an 11 percent pace since May. Profits may suffer if companies can't pass rising raw material and labor costs on to consumers.

Treasury Market

The yield on the benchmark 10-year Treasury note retreated 7 basis points to 4.92 percent at 2:34 p.m. in New York. The dollar fell against the yen and euro. The Standard & Poor's 500 Index rose 14.4 points, or 1.1 percent.

New York state manufacturing grew at a slower pace this month, a separate report showed. The New York Fed's general economic index dropped to 10.3, the lowest since June 2005, from 16.6 in July. A number greater than zero signals a higher percentage of manufacturers surveyed reported an improvement in business than deterioration.

In another report today, the Treasury Department said international investors increased purchases of U.S. securities in June. Net holdings of Treasury notes, corporate bonds, stocks and other financial assets increased $75.1 billion, up from May's revised $63.6 billion.

Analysts expected inflows of $65 billion, the median of 19 forecasts in a Bloomberg News survey. International purchases of U.S. securities peaked at $102.6 billion in October and averaged $75.5 billion in the 12 months through May.

Current Account

The investments were more than enough to cover June's $64.8 billion trade deficit, which some analysts say is an indicator of how easily the U.S. can pay for its record current account and trade shortfalls.

Fed policy makers decided last week against an 18th rate increase since June 2004, and said that while ``readings on core inflation have been elevated in recent months,'' those ``pressures seem likely to moderate over time.''

Bernanke told lawmakers on July 19 that central bankers ``can't do anything'' about current inflation statistics ``because our policy works with a lag. So we have to be looking at a forecast, or the future, to make those judgments and to assess the risks.''

Passenger car prices declined 0.8 percent in July, the most since April, after a 0.9 percent increase. Costs of light trucks fell 3.1 percent, the most since April 2003.

Auto Discounts

Automakers and computer companies facing stiff competition are using discounts to lure customers, helping hold down inflation.

Edmunds's data show automakers' total discount spending rose 15 percent to $4.5 billion last month from June. DaimlerChrysler AG's Chrysler unit, whose July sales fell 37 percent, this month extended employee discounts for all buyers of its cars and trucks through August.

Auburn Hills, Michigan-based DaimlerChrysler management board member Eric Ridenour said the world's fifth-largest carmaker will continue cutting vehicle prices for Chrysler products in the U.S. as competitors extend incentives and rebate programs.

``We've seen negative pricing over the last several years and we really expect that in the future,'' Ridenour said in an interview Aug. 9.

`Aggressive'

Prices for capital equipment declined 0.2 percent after a 0.3 percent increase. Computer prices dropped 1.8 percent last month.

Seagate Technology Chief Executive Officer Bill Watkins said he expects product pricing will continue to be ``aggressive'' as rivals of the No. 1 maker of computer disk drives fight to gain sales. He made the remarks in an interview Aug. 9.

The costs of intermediate goods, those used in earlier stages of production, rose 0.5 percent last month. They were up 8.9 percent in the 12 months ended in July. Prices of raw materials, or so-called crude goods, rose 3.1 percent and were up 6.6 percent in the last 12 months.

Excluding food and energy, intermediate prices increased 0.7 percent after rising 0.8 percent in June. Compared with a year ago, core intermediate goods costs rose 7.9 percent.

Fed policy makers are counting on slower economic growth to limit inflation. Gross domestic product, the sum of all goods and services produced in the country, will expand at an average annual rate of less than 2.8 percent in the second half of the year, compared with a 4.1 percent first-half pace, according to the median forecast of 69 economists surveyed from July 28 through Aug. 10.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: August 15, 2006 15:51 EDT