The Producer Price Index dropped 0.4 percent in February, the largest decline since January 1998. The core rate, which excludes food and energy prices, was unchanged.
The PPI had risen abruptly on higher drug prices in December and higher food and energy price in January. In February, the PPI returned to its recent trend of declining prices. In the past 12 months, the PPI has risen 0.5 percent.
Economists surveyed by CBS.MarketWatch.com were expecting the PPI to fall 0.1 percent and for the core rate to be unchanged.
The report comes 18 days before the Federal Reserve's policymaking Federal Open Market Committee meets again to discuss monetary policy. Few analysts predict a change in policy, particularly after Fed Chairman Alan Greenspan told a congressional committee that risks to the economy were balanced and policymakers needed to be ready to go in either direction.
The Labor Department will report on the Consumer Price Index next week.
In February, food prices fell 1.4 percent, the biggest decline since July 1982. Energy prices dropped 1 percent, mostly on a 4.1 percent drop in heating oil prices. Gasoline prices rose 0.2 percent.
The good news on energy prices could be over. Crude oil prices have jumped in recent weeks on speculation that production will be cut back by the Organization of Petroleum Exporting Countries.
Prices of most commodities continued to drop in February. Crude goods prices fell 3.4 percent and are now down 12.2 percent from a year ago. Prices at the intermediate level fell 0.5 percent and are down 2.7 percent from a year earlier.
Capital goods prices rose a moderate 0.1 percent in February.
Written By Rex Nutting, CBS MarketWatch