U.S. producer prices took their sharpest tumble in October since a matching record drop five years ago, influenced by cheaper energy that also sapped retail sales and showed a softening pace of economic activity.

A Labor Department report on Tuesday said its Producer Price Index (PPI) that measures prices at the factory and farm level dropped 1.6 percent. It matched a record fall in October 2001 and was three times the decline Wall Street analysts had predicted.

Core producer prices excluding food and energy fell 0.9 percent, the biggest fall since a 1.2 percent decline in August 1993.

Meanwhile, the Commerce Department said overall retail sales weakened by 0.2 percent in October after a 0.8 percent fall in September. It was partly because consumers were spending less on gasoline but any drop in consumer spending, which fuels two thirds of U.S. economic activity, makes financial markets wary.

"These numbers are the latest indication that the U.S. economy is slowing and that inflation is in fact decelerating," said Mark Meadows, a currency strategist with Tempus Consulting in Washington.

Some big Wall Street firms lowered estimates for economic growth out of concern that consumers might rein in their spending. Goldman Sachs said it now foresaw gross domestic product, or GDP, expanding at a 2 percent annual rate in the fourth quarter this year and first three months of 2007 rather than 2.5 percent.

STOCKS TREAD WATER

Bond prices rose on the signs of reduced inflationary pressures in the PPI report. Stock prices trod water, savoring the prospect that moderate inflation might mean the Federal Reserve will keep interest rates on hold but worried that corporate profits might come under pressure if sales soften.

Prices in interest rate futures markets showed investors thought that, with tame wholesale prices, Fed policy-makers might cut rates earlier in 2007 or, at least, feel no need for one final rate hike as "insurance" against inflation.

Those perceptions may quickly shift on Thursday, however, when the more acutely watched Consumer Price Index is released and provides insight into whether muted wholesale costs are also holding down prices that Americans pay at the gas pump and grocery store.

In Tuesday's report, falling prices for new cars and trucks also were a significant factor pushing down producer prices. Light-truck prices dropped a record 9.7 percent in October after rising 3.5 percent in September while passenger car prices fell 2.3 percent after a 2.8 percent gain in September.

Department officials said that excluding car and truck prices, October core producer prices were up a slight 0.1 percent.

RETAIL SALES

Last month's retail sales drop was not as steep as the 0.4 percent decline analysts had predicted, primarily because new-car sales that account for a significant part of monthly sales climbed 0.6 percent following a revised 0.7 percent gain in September.

If sales of new cars and parts were stripped out, October retail sales fell 0.4 percent -- somewhat steeper than the 0.2 percent analysts had forecast.

Some analysts said it did not appear that consumers were throwing in the towel on spending.

"In general, when we're looking at the macro picture, you want to know how is the consumer doing, and excluding gasoline purchases, it's a fairly good number," said Richard Sichel, chief investment officer with Philadelphia Trust.

A third government report, from the Commerce Department, showed U.S. business inventories up a smaller-than-expected 0.4 percent in September. But sales fell 2 percent to $1.051 trillion, the biggest monthly decline in business sales since a 2.2 percent drop in January 1996, the department said.

But a separate and more current survey of U.S. chain-store sales, the Johnson Redbook Index, showed sales in the week ended November 11 rose 3.3 percent on a year-over-year basis. That was just slightly below the prior week's 3.4 percent rise.

A similar survey by the International Council of Shopping Centers and UBS Securities found chain store sales rose 2.1 percent in the November 11 week year-on-year.

The Labor Department said energy prices fell 5 percent in October on top of September's 8.4 percent decline. Natural gas prices for home heating were down a record 9.3 percent.