Updated from 11:49 a.m. EDT

The Fed probably has more leeway to cut interest rates after this morning's economic data. But some analysts think it also has less reason.

Producer prices decreased 0.2% in July, the Bureau of Labor Statistics said, compared with forecasts for a 0.1% increase. The drop follows a 0.1% advance in June and a 0.4% decline in May. Excluding prices for the index's more volatile food and energy components, core PPI fell 0.3% in July.

Price reductions were concentrated in cars and trucks, however, in addition to electronic goods, appliances and apparel. During July, Big Three automakers Ford, General Motors, and DaimlerChrysler reintroduced financing incentives to move vehicles off their lots.

"When you pick apart the index, you see the drop came from vehicle incentives," said Diane Swonk, an economist at Bank One. "It is not at all clear this report suggests deflation in the economy."

Ahead of the Federal Reserve's meeting Tuesday, the PPI report indicates little risk of inflation. That gives the Central Bank room to lower rates -- now at their lowest level in 40 years -- if it wanted to. Year-over-year producer price inflation came in at -1.1%, compared to -2% in June. Core inflation fell to -0.2%, its second negative value ever. The other one was during the 1998 Asian financial crisis.

"This is an unusual event," said Peter Kretzmer, an economist at Banc of America Securities. "From a Fed point of view, they are not at a point where they are running out of room to stimulate the economy."

Over the past two weeks, weakness in manufacturing surveys, consumer confidence and monthly employment data have stimulated discussion about a rate cut this year to prevent a double-dip recession. Talk picked up steam after the June employment report revealed anemic non-farm payroll growth.

The PPI data, which only takes a third of the economy into account, might not be enough to warrant Fed action, however. Service prices, as measured by the consumer price index, have lately been rising.

Further, Swonk does not think recent economic reports give reason for a rate cut. "Inventories are building again for the first time in a while," she said. "And the employment situation is stabilizing."

Initial jobless claims fell 15,000, to 376,000 in the week ended Aug. 3, below estimates of 387,000. The four-week average, which adjusts for volatility, fell to 379,000, its lowest level since March.

"Weekly jobless claims -- which are now at levels well below where they were in the recession -- suggest that the labor market is OK," said Josh Feinman, an economist at Deutsche Bank Asset Management. "This is not data that suggest an economic recovery is unraveling."

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