Updated from 8:41 a.m. EST

Inflation on the wholesale level posted a larger-than-expected decline in December.

The government Friday said the producer price index fell 0.7%. Excluding food and energy costs, prices rose 0.1%. Economists expected a decline of 0.2% and an increase of 0.2%, respectively.

The largest monthly decline in a year and a half was driven by a 4.0% slide in energy prices during December, when crude oil prices touched their lowest levels since the spring.

The PPI surprise comes amid growing speculation that the Fed has changed its thinking on interest rate policy and is more concerned about a pickup in inflation than it was before. In December, the central bank raised interest rates a quarter of a percentage point for the fifth time since late June, taking the fed funds rate up to 2.25%. The Fed does not officially meet again until February, but the bank has been known to changes rates inbetween meetings.

The December reading is the latest surprise in a somewhat volatile year for the index, given the overall increase in crude oil and gasoline prices and their monthly variations.

For all of 2004, the index was up 4.1%, a hair more than 2003. Of greater import is that core prices -- which exclude energy and food items -- rose at a 2.2% annual pace, twice that of the previous year.

In November, the producer price index rose 0.5%, much more than the consensus estimate of 0.1%. Excluding food and energy costs, however, prices rose just 0.2%, as expected. Energy costs rose 1.8%, led by natural gas prices. In October, the index rose 1.7% overall and 0.3%, excluding food and energy prices. Prices for energy goods turned up 6.8%.

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