updated 10/20/2009 8:49:28 AM ET 2009-10-20T12:49:28

Wholesale prices dropped unexpectedly in September due to lower energy costs, as inflation remains in check amid signs of a broad economic recovery.

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The Labor Department said Tuesday that the Producer Price index fell 0.6 percent last month. Wall Street economists expected a flat reading. The drop comes after a steep rise in August.

In the 12 months ending in September, the index dropped 4.8 percent, more than analysts expected and the 10th straight month of annual declines.

Excluding volatile food and energy costs, the core index fell 0.1 percent in September. In the year ending last month, the core rose 1.8 percent. Both figures were below analysts' forecasts.

The PPI tracks the prices of goods before they reach store shelves and is considered an early read on price trends. It has been on a roller-coaster in recent months, reflecting wide swings in energy costs. The index fell 6.8 percent in the year ending in July, the largest decline on records dating to 1947.

Rising unemployment, wary shoppers and tight credit have kept a lid on prices. That has enabled the Federal Reserve to keep the short-term rate it controls at its record low rate of nearly zero, where it is expected to remain until sometime next year.

The decline in September wholesale prices was largely driven by gasoline, which fell 5.4 percent, and heating oil, which dropped 9.8 percent. Those changes followed steep rises in August, when wholesale gas prices jumped 23 percent.

Energy prices have fallen steeply over the past year. Wholesale gasoline prices have plummeted 37.5 percent from record heights reached last summer, when prices at the pump topped $4. That has driven down the broader index.

Most analysts believe the economy is growing at about a 3 percent clip in the second half of this year, ending the worst recession since the 1930s. But the rebound isn't expected to trigger inflation anytime soon because unemployment remains high and the manufacturing sector is running well below capacity, making it easier for companies to boost production.

Tuesday's report follows a mild consumer price report from the Labor Department last week. Consumer prices rose 0.2 percent in September, and have fallen 1.3 percent in the past year. Excluding food and energy, core consumer prices also rose 0.2 in September, and rose 1.5 percent in the past year.  

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