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UPDATE 1-U.S. producer prices up on gasoline, core rate flat

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* Wholesale prices rise 1.1 percent in September * Core producer prices flat, lowest since October 2011

WASHINGTON, Oct 12 (Reuters) - U.S. producer prices rosemore than expected in September as the cost of gasoline surged,but underlying inflation pressures were muted in a sign the U.S.Federal Reserve has room to carry out its new monetary stimulusprogram.

The Labor Department said on Friday its seasonally adjustedProducer Price Index increased 1.1 percent last month.

Economists polled by Reuters had expected prices at farms,factories and refineries to rise 0.7 percent after climbing 1.7percent in August.

Despite the rise in overall wholesale prices last month,there is likely to be little pass-through to consumers givensluggish job growth, which puts a brake on inflation.

Wholesale prices excluding volatile food and energy wereflat last month. That was the lowest reading since October 2011and fell short of analysts' forecasts.

Consumer inflation is currently below the Federal Reserve's2 percent target, and many economists think it will trend belowthat level for years to come.

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In a bid to boost economic activity, the Fed launched anaggressive new stimulus program last month, pledging to buy $40billion of mortgage-backed debt a month until the outlook forjobs improves substantially.

Overall producer prices last month were buoyed by a 4.7percent increase in energy prices. Higher gasoline costs drovethe increase. Wholesale diesel prices also contributed, rising9.2 percent, the biggest one-month gain since December 2010.

"These kinds of energy prices are debilitating to theeconomy and it is one of the reasons why we haven't been able toget any kind of a glide speed above a 2 percent annual rate,"said Cary Leahey, an economist at Decision Economics in NewYork.

Following the release of the data, prices for U.S. 30-yearTreasuries hit a session high as traders bet the core pricereading signaled a muted trend in inflation. U.S. stock futureswere higher after robust earnings from JP Morgan.

Food prices rose 0.2 percent, backing off of the faster paceof price increases seen over the summer when a severe droughtpushed up the cost of grain and soybeans.

In the 12 months to September, producer prices increased 2.1percent, biggest gain since March, after advancing 2 percent inAugust.

Outside food and energy, producer prices were restrained bya decline in the cost of communication equipment.

Core producer prices increased 2.3 percent in the 12 monthsto September.

(Reporting by Jason Lange; Editing by Neil Stempleman)

((jason.lange@thomsonreuters.com)(202 310 5487)(ReutersMessaging: jason.lange.thomsonreuters.com@reuters.net))

Keywords: USA ECONOMY/PRICES