The Labor Department said Tuesday that its producer price index fell 1.4% last month,

best showing since a 1.5% fall last October. It was a much bigger decline than the

0.3% drop that had been expected and was led by a 6.6% plunge in energy costs,

biggest drop in more than four years.

Core inflation, which excludes food and energy, was also well under control, rising

just 0.2%. The good price performance should ease concern about inflation and

give the Federal Reserve leeway to cut interest rates to try to fend off a recession.

Fed policymakers are expected to cut a key interest rate at 2:15 p.m. ET Tuesday

for the first time in four years as they try to make sure that a steep slump in

housing and widening credit market problems do not derail the economy.

The 1.4% drop in the Labor Department's producer price index, which measures

inflation pressures before they reach the consumer, more than reversed a 0.6%

jump in wholesale prices in July.

The government will report on consumer prices Wednesday and that report is also

expected to show inflation pressures slowing. Consumer prices rose just 0.1%

in July.

The Fed pushed interest rates up 17 consecutive times over a two-year

period to try to keep inflation from getting out of hand and then left rates

unchanged more than a year to see if its inflation-campaign had succeeded.

But pressure has intensified in recent weeks for the central bank to cut

rates in the wake of a spreading credit crunch that has disrupted financial

markets around the world.

August's 1.4% drop in wholesale prices was the third decline this year

and left wholesale prices rising over the past 12 months by 2.2%. In

2006, core inflation rose 1.1%.

The 6.6% plunge in energy costs was the sharpest decline since an

8% fall in April 2003. It reflected a 13.8% fall in gasoline prices,

biggest one-month drop since last September, and a record 8.5%

fall in residential natural gas prices. Home heating oil costs plummeted 6%.

Economists noted that crude oil prices have in recent days hit record highs

above $80 per barrel, which could reverse the energy declines in coming

months.

Food costs fell 0.2% in August, fourth straight decline.

In August, vegetable prices dropped 6% with declines also in the price

of eggs and pork. Beef prices rose.

Outside of food and energy, the cost of passenger

cars rose 0.6% but the price of light trucks, the category that includes

sport-utility vehicles, fell 0.9% and computer prices were down 3.2%.