The Labor Department reported Tuesday that wholesale prices dropped by 2.8 per cent in Oct, the biggest one-month decline on records that go back more than 60 years. The previous record holder was a 1.6 per cent fall in Oct 2001, the month after the terrorist attacks.

The overall decline in the department's Producer Price Index was bigger than the 1.8 per cent drop analysts had expected. However, core inflation, which excludes energy and food, was not as well-behaved, rising by a bigger-than-expected 0.4 per cent.

The 0.4 per cent rise in core inflation was attributed partly to special factors and did not alter the view that plunging energy prices and a sharply slowing economy were combining to slash inflation pressures.

The 2.8 per cent overall decrease marked the third straight month that wholesale prices have fallen.

Many economists believe the economy has fallen into a recession that could be the worst downturn in more than two decades. The expectation is falling inflation pressures will give the Federal Reserve room to cut interest rates further to combat the downturn.

The Fed cut interest rates by a half-point in a coordinated move with other central banks on Oct 8 when the turmoil in financial markets was gaining intensity and followed with another half-point reduction on Oct 29.

That pushed the target rate for the federal funds rate, the interest that banks charge each other, down to 1 per cent, matching a low seen only once before in the past half-century.

Many economists believe the Fed will cut the funds rate again when officials hold their last regular meeting of the year on Dec 16.

The PPI report showed that energy prices dropped by 12.8 per cent in Oct, the biggest one-month fall since a 14 per cent decline in July 1986.

All types of energy showed big declines with gasoline falling by a record 24.9 per cent, surpassing the old mark of a 22.1 per cent drop in March 1986.

Home heating oil prices were down 9.6 per cent, natural gas intended for home uses fell by 5.9 per cent, and liquefied petroleum gas dropped by 27.6 per cent, the biggest decline in more than three decades.

Food costs edged down 0.2 per cent as declines in the price of milk and meats offset a big jump in vegetable prices.

Excluding food and energy, the 0.4 per cent increase in core prices reflected higher costs for light trucks, the category that includes sport utility vehicles. The price of tires, civilian aircraft and malt beverages also were higher, although the cost of passenger cars fell by 1.7 per cent. -- AP