U.S. import prices point to smaller drag on inflation

WASHINGTON (Reuters) - U.S. import prices fell only slightly in September, offset by recovering oil prices, suggesting a slowdown in the rate of imported deflation is occurring which may eventually allow the Federal Reserve to raise interest rates.

The Fed held off from raising interest rates in September largely because a weak global economy and financial market volatility had raised doubts that U.S. inflation would rise toward the Fed's target of 2.0 percent as expected.

U.S. import prices fell only 0.1 percent last month in data reported by the Labor Department on Friday, and import prices, excluding oil, fell 0.2 percent, which was half the pace of the declines registered in July and August.

Analysts had expected overall import prices to decline more, by 0.5 percent, and the U.S. dollar strengthened slightly against a basket of currency following the data's release. U.S. stock prices were little changed.

"Today's report suggests a significant slowing in the rate of imported deflation," said Blerina Uruçi, an analyst at Barclays.

A surge in value of the U.S. dollar last year, fueled by expectations that a strengthening U.S. economy would lead to higher interest rates, has been a factor pushing down inflation, as evidenced by declines in non-oil import prices.

Federal Reserve Chair Janet Yellen, who said late last month the Fed was likely to raise rates by year end, has argued that the disinflationary impact from imports was bound to fade and that U.S. inflation would then trend higher. Friday's data appeared consistent with that view.

Already, declines in oil prices have moderated after a late 2014 plunge, and prices for imported oil rose 1.1 percent in September after declining sharply in August.

Crude oil prices have actually trended higher over the last month. The dollar, which strengthened sharply in the second half of 2014, has weakened since March.

The Labor Department data also showed the price of imported consumer goods other than cars actually rose 0.1 percent in September, the first gain since February. Imported car prices were flat.

Still, the data also pointed to ongoing weakness in global demand that is weighing heavily on U.S. factories and other exporters. Export prices fell 0.7 percent, more than the 0.2 percent decline forecast by economists.

A separate report from the Commerce Department showed a rise in wholesale inventories that could point to unwanted inventory build-up, which could weigh on manufacturing and economic growth.

(Reporting by Jason Lange; Editing by Andrea Ricci and Meredith Mazzilli)