WASHINGTON (Reuters) - U.S. import prices recorded their largest decline in nearly two years in May as energy and food costs fell, pointing to muted inflation pressures amid slowing global demand. The Labor Department said on Tuesday import prices fell 1.0 percent, the biggest drop since June 2010, after being flat in April. In the 12 months to May, import prices fell 0.3 percent, posting their first year-on-year decline since October 2009, also reflecting a stronger dollar. The data was the latest sign that falling energy prices were keeping inflation pressures well contained and offered evidence of weakening global demand as the debt crisis in Europe worsens. Against the backdrop of a sputtering economic recovery, economists said the benign inflation environment gave the Federal Reserve some scope to ease policy further through either another round of bond purchases, also known as quantitative easing, or other measures to keep interest rates down. "Price pressures have come off sharply since April...giving the Federal Open Market Committee some breathing room should they want to implement more quantitative easing," said Ellen Zentner, senior economist at Nomura Securities in New York. But the U.S. central bank is not expected to announce new policy initiatives at its two-day meeting next week. Economic activity has cooled off significantly, with job growth braking sharply in the past three months. Some of the slowdown in hiring has been blamed on the debt troubles in Europe, which have created a cloud of uncertainty that is sapping business confidence. A separate report from the National Federation of Independent Business showed its Small Business Optimism Index eased 0.1 percentage point to 94.4 in May. Last month, imported petroleum prices dropped 4.2 percent, the largest fall in two years, after slipping 0.4 percent in April. Weak petroleum prices should help to further lower the cost of gasoline, freeing up income for households. Imported food prices fell 0.7 percent last month after edging up 0.1 percent in April. Outside fuels and food, import prices were unchanged, with the cost of automobiles and industrial supplies and materials declining. Falling energy costs probably dampened wholesale prices in May. Data on Wednesday is expected to show producer prices fell for a third month in a row, according to a Reuters survey. Excluding food and energy, wholesale inflation likely remained tame last month. However, economists do not expect the weaker prices to filter through to consumers on a broad scale. "The fall off in imported core consumer goods price inflation has been fairly mild compared to other components," said Peter Newland, a senior economist at Barclays in New York. Gains in core CPI are likely to continue to be driven by the more heavily weighted and less import sensitive services components, such as shelter costs. Imported industrial supplies and material prices recorded their biggest fall in nearly two years in May. Imported capital goods prices were unchanged, while the cost of imported motor vehicles fell for the first time since December. In the 12 months to May, export prices slipped 0.1 percent, the first year-on-year fall since October 2009. Editing by Andrea Ricci and Chizu Nomiyama