Producer prices dropped more than expected in May, and the annual producer-inflation increase was the smallest in almost two-and-a-half years, (subscription) reports.

What鈥檚 going on: 鈥淚n the 12 months through May, the [Department of Labor鈥檚 Producer Price Index] climbed 1.1%. That was the smallest year-on-year rise since December 2020 and followed a 2.3% increase in April. The annual PPI rate is moderating as last year鈥檚 surge drops out of the calculation.鈥�

• Producer prices for final demand goods fell 1.6% in May, owing largely to falling energy costs, after increasing an unrevised 0.2% in April.
• Economists surveyed by Reuters had predicted the PPI would dip 0.1% from April and rise 1.5% year-on-year.

The backdrop: The report comes a day after the Labor Department reported the smallest year-on-year increase in U.S. consumer prices in more than two years.

Why it鈥檚 important: Federal Reserve 鈥渙fficials are expected to keep rates unchanged at the end of their two-day meeting, for the first time since March 2022 when the U.S. central bank embarked on its fastest monetary policy tightening campaign in more than 40 years. 鈥� [The central bank] was seen leaving the door open to further rate increases given the economy鈥檚 resilience, particularly the labor market.鈥�