updated 6/16/2009 9:42:51 AM ET 2009-06-16T13:42:51

Wholesale prices rose less than expected in May as a drop in food costs helped keep overall prices down.

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The Labor Department said Tuesday that the Producer Price Index increased by a seasonally adjusted 0.2 percent from April. That's below analysts' expectations of a 0.6 percent rise.

Despite the increase, wholesale prices fell 5 percent in the past 12 months. That's the largest annual drop in almost 60 years.

Excluding volatile food and energy prices, the core PPI dropped 0.1 percent in May, also below analysts' forecasts of a 0.1 percent rise.

Falling prices can raise fears about deflation, a destabilizing period of extended declines. But most economists believe that efforts by the Federal Reserve to combat the recession will prevent that from happening.

A 2.9 percent rise in energy prices, including a 13.9 percent jump in the cost of gas, drove the May increase. Pump prices reached about $2.50 a gallon by the end of last month.

Food prices, meanwhile, fell 1.6 percent, reversing a similar rise in April. Egg prices plummeted 27 percent, after jumping 43.7 percent in April.

The government is scheduled to release consumer price data Wednesday. The consumer price index is expected to increase 0.3 percent in May after a flat reading in April. The core CPI is forecast to rise 0.1 percent.

Both wholesale and consumer prices have fallen from a year ago, which has led some economists to worry about deflation. The U.S. has not seen a bout of deflation since the Great Depression.

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But the Fed has cut a key interest rate to a record low near zero and taken a number of other extraordinary measures to flood the banking system with cash.

There are concerns about deflation in other parts of the world, especially in Japan. That country underwent a difficult bout of deflation during the 1990s, a period when the world's second largest economy struggled to emerge from a real estate and banking crisis.

Price declines also have been registered in other major Asian economies including China and India.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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