WASHINGTON (Reuters) - U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate hike.

FILE PHOTO: A woman shops for produce inside a Whole Foods Market in the Manhattan borough of New York City, New York, U.S. June 16, 2017. REUTERS/Carlo Allegri/File Photo

Other data on Thursday showed an increase in the number of Americans filing for unemployment benefits last week. The trend in weekly jobless claims, however, remained consistent with a tightening labor market.

“Another twist of the screw tighter for this labor market but inflation is not able to gain a foothold in this economy,” said Chris Rupkey, chief economist at MUFG in New York. “The pot is on the stove boiling but no inflation steam is coming out.”

The Labor Department said its producer price index for final demand slipped 0.1 percent last month, weighed by decreasing costs for services. That was the largest decline since August 2016 and reversed June’s 0.1 percent gain.

In the 12 months through July, the PPI increased 1.9 percent after rising 2.0 percent in the year through June. Economists had forecast the PPI to tick up 0.1 percent last month and 2.2 percent from a year ago.

A key gauge of underlying producer price pressures that excludes food, energy and trade services was unchanged last month. The so-called core PPI gained 0.2 percent in June. The core PPI increased 1.9 percent in the 12 months through July after advancing 2.0 percent in June.

Though the correlation between the PPI and the consumer price index has weakened, last month’s drop in producer prices could worry Fed officials who have long argued that the moderation in inflation was temporary.

Fed Chair Janet Yellen told lawmakers last month that “some special factors” were partly responsible for the low inflation readings. Inflation, which has remained below the U.S. central bank’s 2 percent target for five years, is being watched for clues on the timing of the next interest rate increase.

The Fed is expected to announce a plan to start unwinding its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at a policymaking meeting next month.

But low inflation, characterized by sluggish wage growth, suggests the central bank could delay raising rates again until December. It has increased borrowing costs twice this year.

The government will release July’s CPI report on Friday.

Prices of U.S. Treasuries rose after the data and also benefited from safe-haven trades amid escalating tensions between the United States and North Korea. The dollar was little changed against a basket of currencies, while U.S. stocks fell.

JOBLESS CLAIMS RISE

In another report on Thursday, the Labor Department said initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 244,000 for the week ended Aug. 5.

With the labor market near full employment, there is probably limited room for claims to continue declining. Claims have now been below 300,000, a threshold associated with a healthy labor market, for 127 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller. The unemployment rate is 4.3 percent.

A tightening labor market and tepid inflation have put the Fed in a difficult position.

Last month, prices for services fell 0.2 percent, the first decline since February. That accounted for more than 80 percent of the decrease in the PPI. Services were undercut by a 0.5 percent drop in the index for final demand trade services.

Services, which had increased for four straight months, are volatile month-on-month.

“They have a large weight in the final-demand measure, but have little relationship to CPI services prices,” said John Ryding, chief economist at RDQ Economics in New York.

The cost of healthcare services rose 0.3 percent after being unchanged in June. Those costs feed into the Fed’s preferred inflation measure, the core personal consumption expenditures price index.

Energy prices fell for a third straight month in July while the cost of food was unchanged after a 0.6 percent jump in June.

Core goods prices fell 0.1 percent in July after eight straight months of gains.