A record fall in American producer prices last month has led Wall Street to price-in a half-percentage-point cut in interest rates, to 0.5 per cent, when the US Federal Reserve meets on December 16.

The 2.8 per cent drop in producer prices in October, triggered by the collapse of global energy prices, was bigger than Wall Street had expected.

It also validates the measures by the Fed, which recently dramatically cut the cost of borrowing.

Before the banking crisis erupted three months ago, Ben Bernanke, the Fed Chairman, had been reluctant to reduce interest rates much amid concerns that cheaper borrowing would stoke inflation.

At the time, he was worried that inflation posed a real threat to the US economy amid high oil and food prices. New data from the US Labour Department yesterday showed that the collapse of commodity values caused by the global recession has affected manufacturing costs. In October, the price of petrol in the United States fell by almost a third.

US producer prices are a measure of how much money manufacturers in America receive for their goods. A fall in producer prices puts pressure on consumer prices - the main measure of inflation. As energy prices fall, the operating costs of manufacturers fall both for paying utility bills and for the price of the basic materials and chemicals they use to make their goods. Energy costs fell 12.8 per cent in October, the biggest decline for 22 years.

While core producer prices, which exclude food and energy, shot up four times faster than expectations, to 0.4 per cent over the month, many economists believe the rise to be a hangover from the period of a high oil price and that it will fall soon. The figure includes items such as lorries, farm equipment, detergents and tyres.

Ian Shepherdson, chief US economist at High Frequency Economics, said: “We view these as legacy rises after the surge in commodity prices that is now reversing.”

Separately, Mr Bernanke told the Financial Services Committee on Capitol Hill that credit markets, while stabilising, remained under serious strain and government capital injections into banks are needed to help to restore normal lending.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts