WASHINGTON (Reuters) - U.S. producer prices increased more than expected in September amid a surge in the cost of hotel and motel accommodation, leading to the first year-on-year gain since March. But the report from the Labor Department on Wednesday, which also showed a jump in the price of iron and steel scrap, did not change the view that overall inflation was cooling amid excess capacity at industries. It, however, confirmed that fears of deflation, which dominated when the COVID-19 pandemic started in the United States, were misplaced. Deflation, a decline in the general price level, is harmful during a recession as consumers and businesses may delay purchases in anticipation of lower prices. Economists expect the Federal Reserve will keep interest rates near zero at least through next year. “The prices of some producer prices are climbing, but factories are not back to normal yet,” said Chris Rupkey, chief economist at MUFG in New York. “Fed officials will remain cautious on the inflation outlook until producer price pressures heat up further.” The producer price index for final demand rose 0.4% last month after advancing 0.3% in August. A 0.4% increase in the cost of services accounted for nearly two-thirds of the gain in the PPI last month. Services increased 0.5% in August. In the 12 months through September, the PPI rebounded 0.4% after falling 0.2% in August. Economists polled by Reuters had forecast the PPI would gain 0.2% in September and rise 0.2% on a year-on-year basis. Excluding the volatile food, energy and trade services components, producer prices rose 0.4% in September. The so-called core PPI had increased by 0.3% for three straight months. In the 12 months through September, the core PPI climbed 0.7%. The core PPI gain 0.3% on a year-on-year basis in August. U.S. stocks were trading largely flat. The dollar .DXY slipped against a basket of currencies. U.S. Treasury prices were mostly higher. CONSIDERABLE SLACK The government reported on Tuesday that consumer prices increased 0.2% in September, with a 6.7% jump in prices for used cars and trucks accounting for most of the gain. Business closures to slow the spread of the coronavirus caused bottlenecks in the supply chain, pushing up prices of some goods. Though supply chain disruptions have eased, weak demand and slack in the labor market are limiting businesses’ ability to raise prices. The Fed is now more focused on the labor market and has embraced flexible average inflation targeting, which in theory could see policymakers tolerate price increases above the U.S. central bank’s 2% target for a period of perhaps several years to offset years in which inflation was lodged below that goal. The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, rose 1.6% in the 12 months through August. September’s core PCE price index data is scheduled to be released at the end of this month. With new coronavirus infections surging across the United States and the recovery from the downturn, which started in February, showing signs of stress, inflation could remain tepid. At least 25.5 million people are on unemployment benefits. The third straight monthly increase in services in September was driven by a 3.9% jump in prices for hotel and motel accommodation. There were also increases in the costs of hardware, building materials and supplies. Margins for final demand trade services, which measure changes in margins received by wholesalers and retailers, increased 0.2%. Hospital inpatient care rebounded 0.4%, leading to a 0.2% rise in healthcare costs. Portfolio fees shot up 1.4%. Prices for airline tickets rebounded 2.5%. Those airline ticket, healthcare and portfolio management costs feed into the core PCE price index. With the relevant CPI and PPI components in hand, economists are predicting the core PCE price index increased by between 1.6% and 1.7% in September. Some, however, cautioned that used motor vehicles were a wild card. Used cars and truck prices surged in August and September, driving consumer prices in each of the two months. Daniel Silver, an economist at JPMorgan, noted that there has been “an unusual relationship between PPI data and PCE data related to used vehicles in recent months.” Wholesale goods price inflation also picked up last month, boosted by a 14.7% surge in the cost of iron and steel scrap. Prices for goods accelerated 0.4% after edging up 0.1% in August. Food prices rebounded 1.2% following three straight monthly declines, but the cost of wholesale gasoline fell 2.8%. Excluding food and energy, wholesale goods prices increased 0.4% after climbing 0.3% in August. The fourth straight monthly increase in core goods prices likely reflects a weaker dollar. The greenback has dropped 2.8% against the currencies of the United States’ main trade partners since July. “Goods inflation will remain healthy over the coming months,” said Blerina Uruci, an economist at Barclays in Washington.