U.S. wholesale prices fell in December for the third straight month, the government said on Friday in a report showing contained inflation as the sluggish global economy kept imported energy prices down. 

The Producer Price Index -- a measure of costs at the factory door and farm gate -- tumbled 0.7 percent after a decline of 0.6 percent the prior month, the Labor Department said. 

The drop in prices was steeper than the 0.2 percent dip expected by Wall Street economists and may give the Federal Reserve leeway to cut interest rates again if needed without creating a jump in prices. 

``It's certainly a good sign as far as future pipeline inflation is concerned. The goods side of the inflation equation is very encouraging,'' said Alan Ruskin, Research Director at 4Cast Ltd., New York. 

Excluding the volatile food and energy sectors, prices also fell. So-called core wholesale prices dropped 0.1 percent. Analysts were expecting the core to rise 0.1 percent. 

Gasoline prices continued their downward spiral, falling 8.2 percent. The price of passenger cars tumbled 0.7 percent following a rise of 0.9 percent in November. 

In 2001 as a whole, prices fell 1.8 percent, the biggest decline since 2.3 percent in 1986. 

The report also showed there is little sign of inflation coming down the pipe. Intermediate prices for items like lumber and plastics that are used to make other goods fell 0.9 percent in December after a 0.5 percent drop in November. 

Prices for crude goods, or raw materials like logs and metal ores, fell 9.5 percent after a rise of 7.3 percent in November. Crude petroleum costs plunged 21.6 percent, the biggest decline since February 1991. 

The Fed's policy arm is due to meet on Jan. 29-30 to discuss whether to reduce interest rates after loosening monetary policy 11 times last year. 

``We are in a low-inflation environment and it is appropriate for the Fed to have low interest rates in that kind of environment,'' said Gary Thayer, Chief Economist, A.G. Edwards & Sons Inc., St. Louis. ``We think there is a possibility for a rate cut at the next meeting.'' 

A Reuters poll carried out last week found 18 of 24 primary dealers believed the Fed will cut its benchmark federal funds rate by a quarter-percentage point at its next meeting. 

Fed Chairman Alan Greenspan is due to deliver a key speech later on Friday and markets will be watching closely to see if he gives any hint about the future direction of interest rates.