Prices paid to U.S. producers fell in April as a sharp drop in food costs more than offset rising energy prices, the government said on Friday in a report that showed wholesale prices well-contained.

The Producer Price Index, a closely watched wholesale inflation gauge, fell 0.2 percent last month after a 1.0 percent surge in March, the Labor Department said.

Stripping out volatile food and energy prices, the so-called core PPI rose 0.1 percent in April, matching the increase posted a month earlier.

U.S. economists in a Reuters survey had forecast a 0.4 percent increase in overall producer prices and a 0.2 percent gain in the core index, but markets showed little reaction to the unexpected April decline.

Economists said there seemed little imminent threat from price pressures and that the report added weight to the view that the Federal Reserve will hang fire for some time before beginning to reverse some of the 11 interest rate cuts it made last year.

"This is a very favorable report," said Richard DeKaser, chief economist at National City Corp. in Cleveland. "In the context of what we've seen in the recent past, the Fed is right to say that inflation has been quiescent. It gives them more latitude to forestall an inevitable rate hike,"

A 3.2 percent drop in food costs, where widespread decreases were led by a record plunge in vegetable prices, swamped the impact of a 2.5 percent rise in energy prices and led to the first drop in the PPI since December.

Over the 12 months ended in April, producer prices have fallen 2.0 percent, but many economists see that downward trend reversing as the economy recovers.

Further back in the production pipeline, prices moved higher last month.

Intermediate goods prices rose 0.9 percent on the back of higher energy costs, and the core intermediate index was up 0.2 percent.

Prices at the crude goods level rose 5.5 percent, in part due to rising energy prices. But even excluding food and energy costs, crude goods prices shot up 3.6 percent, their biggest rise since a 4.6 percent increase in June 1979.

While economists say those prices bear watching, a sharp 8.6 percent rise in first-quarter U.S. business productivity — or output per hour — should help keep any bubbling price pressures from spilling over into consumer prices.

The department is scheduled to release the Consumer Price Index for April next Wednesday. Economists look for a rise of 0.4 percent overall and 0.2 percent excluding food and energy.

With retail prices under wraps, Fed policymakers decided to hold interest rates steady when they met on Tuesday, saying the outlook for growth in consumer and business demand was uncertain.

U.S. gross domestic product jumped 5.8 percent in the first quarter of 2002, but that rise was largely because companies did not cut inventories as sharply as they had in the fourth quarter.