Sharp drops in fuel and food costs reduced a measure of US wholesale prices in April by the most in three years. But outside those volatile categories, inflation stayed tame, new figures show.

The producer price index, which measures price changes before they reach the consumer, fell a seasonally adjusted 0.7% in April from March, the Labour Department said today.

It was the second monthly decline in a row and the largest since February 2010.

The index declined largely because petrol prices dropped 6% and the price of home heating oil fell by the most in almost four years. Food prices were also 0.8% lower. 

Overall wholesale prices have increased just 0.6% over the past 12 months - the smallest yearly gain since July.

Excluding the volatile food and energy categories, core prices ticked up 0.1% in April from March. And core prices have risen only 1.7% in the past 12 months.

Aside from sharp swings in petrol prices, consumer and wholesale inflation has increased slowly in the past year. The combination of modest economic growth and high unemployment has kept wages from rising quickly. That has made it harder for retailers and other firms to raise prices.

Mild inflation gives the US Federal Reserve more latitude to continue with its aggressive policies to spur greater economic growth. The Fed has said plans to keep the short-term interest rate it controls at a record low near zero until the unemployment rate falls below 6.5%, provided inflation remains in check. Unemployment in April dropped to a four-year low of 7.5%.

The Fed is also purchasing $85 billion a month in bonds to keep longer-term interest rates down. That is intended to encourage more borrowing and spending, which drives economic growth. The Fed says it will continue to buy bonds until the job market improves substantially.

Many economists expect the Fed will taper those purchases by the end of the year, particularly if hiring stays healthy. But too-low inflation could cause them to continue. Price increases at about 2% can be good for the economy as they encourage consumers and businesses to spend more before prices rise.

US factory output falls 0.4% in April

But US factories cut back sharply on production in April, as car companies cranked out fewer cars and most other industries reduced output.

The Federal Reserve said that manufacturing output dropped 0.4% in April from March. It was the third decline in four months and the biggest since October.

Production of cars and auto parts fell 1.3% in April. The decline is likely temporary because automakers are reporting stronger sales.

Overall industrial production, which also includes output at utilities and mines, dropped 0.5% in April, the biggest decline since August. Utility output plunged 3.7%, as power output returned to more normal levels after an unusually cold March.