By Shobhana Chandra Nov. 18 (Bloomberg) -- Prices paid to U.S. producers plunged in October by the most on record as the faltering global economy caused demand for commodities to dry up. The larger-than-forecast 2.8 percent drop followed a 0.4 percent decline in September, the Labor Department said today in Washington. So-called core producer prices that exclude fuel and food rose 0.4 percent, indicating that the declines in raw- material costs have yet to feed through to other products. Today's figures, along with a U.K. government report showing Britain's inflation rate fell the most in at least 11 years, show a rising threat of deflation. That's likely to spur central banks to keep cutting interest rates, with some benchmarks approaching zero percent, economists say. ``The broad-based softening of prices shows inflation is contained, and disinflation is taking hold,'' John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey, said before the report. ``It gives the Fed the ammunition to cut rates further.'' Stock-index futures dropped, while Treasuries were little changed. Futures on the Standard & Poor's 500 Stock Index fell 0.5 percent to 846.70 at 8:40 a.m. in New York. Yields on benchmark 10-year Treasury notes were at 3.64 percent. Economists' Forecasts Wholesale prices were projected to decline 1.9 percent, according to the median of 76 forecasts in a Bloomberg News survey. Estimates ranged from declines of 0.3 percent to 2.8 percent. The Labor Department's producer-price index figures date to 1947. Core prices were projected to rise 0.1 percent, according to the survey median. The U.K. inflation rate fell more than economists forecast in October, recording the steepest drop in at least 11 years, the Office for National Statistics said today in London. Consumer prices rose 4.5 percent from a year earlier, compared with 5.2 percent the previous month. Prices paid to U.S. producers rose 5.2 percent from October 2007, after an 8.7 percent gain in the 12 months ended in September. Excluding food and energy, the increase was 4.4 percent from a year earlier, the most since 1989. The drop in wholesale prices was led by a 13 percent decline in fuel costs, the biggest since 1986, and a 0.2 decrease in the cost of food. Price Gauges Producer prices are one of three monthly inflation gauges reported by Labor. Prices of goods imported into the U.S. fell last month by the most on record, a report last week showed. Figures due tomorrow may show consumer prices dropped 0.8 percent in October, the most since 1949, according to the Bloomberg survey. Figures this month indicate prices will keep dropping. The government asks producer-price survey participants to report costs for the Tuesday of the week that includes the 13th. On that basis, crude oil fell 24 percent in October from the prior month on the New York Mercantile Exchange. Oil slid another 25 percent a barrel this month. The costs of intermediate and crude goods, used in the earlier stages of production, also dropped by records, indicating price pressure may keep subsiding. After contracting at a 0.3 percent annual pace in the third quarter, the U.S. economy may shrink again this quarter and the first three months of 2009, according to a Bloomberg survey conducted from Nov. 3 to Nov. 11. The slump would be the longest since 1974-75. Recessions Abroad Europe and Japan slipped into a recession last quarter, and China's economy, the biggest contributor to global growth in 2007, is slowing. Dow Chemical Co., the largest U.S. chemical maker, is among producers hurt by a drop in demand. The prices Dow charges for two of the most-used plastics, polyethylene and polypropylene, fell as much as 40 percent since September, giving up gains achieved since June, the company said. Midland, Michigan-based Dow is closing more factories as sales decline. ``This is as bad as we have ever seen it in our lifetimes,'' Chief Executive Officer Andrew Liveris said in a Nov. 13 interview. An increase in prices ``is probably going to be near impossible in the next three to six months.'' To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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