A sharp plunge in energy prices pulled U.S. producer prices down 0.7 percent last month, a sharper-than-expected drop and the biggest in more than 1½ years, a government report showed on Friday.

Prices received by producers were also well contained when excluding volatile food and energy costs, advancing a mild 0.1 percent, the Labor Department (search) said.

Wall Street economists had forecast just a 0.1 percent decline in the producer price index (search), which measures prices received by farms, factories and refineries, and had expected the so-called core rate to rise 0.2 percent.

The report was likely to help ease concerns that rising production costs could spill over into higher consumer prices, although oil prices have again moved higher on forecasts of cold weather and supply concerns.

For the year as a whole, producer prices rose a steep 4.1 percent as oil prices jumped. It was the biggest calendar year gain since an oil price spike in 1990 sent producer prices up 5.7 percent. The department said core prices rose 2.2 percent last year, the largest yearly advance since 1998.

In December, energy prices fell 4.0 percent. Like the overall decline in producer prices, it was the biggest energy price drop since April 2003, the department said.

Gasoline prices (search) skidded 11.1 percent, liquefied petroleum gas costs plunged 14.0 percent, home heating oil fell 8.0 percent and the cost of residential natural gas, which had soared 6.2 percent in November, slipped 1.6 percent.

Food prices edged up just 0.1 percent and prices received for cars and light trucks and SUVs both fell slightly in December, the report showed.

The report showed falling energy prices also helped restrain costs at early stages of production. So-called intermediate goods prices fell 0.3 percent in December and crude goods costs declined 2.9 percent.