Updated from 9:37 a.m. EST

Prices paid to wholesale producers fell more sharply than expected in December, ensuring that the overall drop in prices in 2001 was the largest decline in 15 years, the Labor Department reported Friday.

The

producer price index decreased 0.7% last month, compared with a 0.2% drop forecast by economists polled by

Reuters

. The core PPI, which excludes volatile food and energy components, slipped 0.1%.

For the year, the PPI fell 1.8%, the biggest drop since 1986, when the index tumbled 2.3%. The December decline was led by falling energy costs. Gasoline prices tumbled 8.2%, and prices for home heating oil, residential natural gas, diesel fuel and electric power were also lower.

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The PPI data leave the

Federal Reserve room to cut interest rates again, economists say. "If they were predisposed to easing again, this gives them confidence," said Joel Naroff, president of Naroff Economic Advisors, an economic consulting firm. "But no matter what happens, the Fed isn't going to let the economy falter."

With inflation low, the Fed's priority has been getting the economy back on its feet. Since the beginning of 2001, the central bank has cut interest 11 times, bringing the

fed funds target rate to 1.75%.

In a speech in San Francisco Friday, Fed Chairman Alan Greenspan said the economy has begun to show signs of stabilization, but he indicated that significant risks remain.

"There are sound reasons for concluding that the long-run picture remains bright, and even recent signals about the current course of the economy have turned from unremittingly negative through the fall of last year to a far more mixed set of signals," Greenspan said in prepared remarks for the speech. "But I would emphasize that we continue to face significant risks in the near term."

Among Greenspan's concerns are profits and investments, as well as consumer spending, which he said could be affected by rising interest rates, more job losses and lower equity prices.

"While there are some signs of turning points, there isn't convincing evidence that the current economic downturn is over," said Ethan Harris, a senior economist at Lehman Brothers. "At some point, we'll have to worry about inflation. But not this year."