PRICE FALL DEFIES EXPECTATION; NEWS HAILED AS SIGN INFLATION LITTLE THREAT.

Byline: Robert D. Hershey Jr. The New York Times

In an inflation report better than the most optimistic predictions, prices paid to U.S. manufacturers and other producers fell six-tenths of 1 percent in April, the biggest monthly drop in nearly four years, government figures showed Wednesday.

``It was, almost across the board, fabulous news,'' said Noralyn Marshall, an economist with Scotia Capital Markets in New York. ``There is no serious visible inflation currently or in the pipeline.''

The decline in the Producer Price Index for Finished Goods, which pulled inflation at the producer level down to less than 1 percent over the last year, touched off early rallies in the bond and stock markets. Analysts had been expecting no change in the index.

Investors were heartened by the report because it suggested that inflation continued to be contained and that, as a result, Federal Reserve policy makers would have little reason to raise short-term interest rates when they meet Tuesday. But stock and bond prices later retreated to end little changed on the day.

While analysts said Wednesday that Alan Greenspan, the Fed chairman, would now have a harder time defending a rate increase, few said that either Wednesday's inflation numbers or those contained in today's report on consumer prices would be decisive.

``We're in a different environment'' with the unemployment rate below 5 percent and the economy apparently still running faster than its sustainable long-term trend, said Nicholas S. Perna, an economist with Fleet Financial Group in Hartford, Conn. He put the odds that the Fed would raise rates next week for the second time this year at still ``close to even money.''

Evelina M. Tainer, chief economist at Indosuez Carr Futures in Chicago, noted that the lagging nature of inflation data made Wednesday's report a poor guide to policy moves by the Fed, which looks ahead for bottlenecks and other pressures that are inflation's source.

But she said Fed officials had ``time on their side'' to wait for the economy to cool and were somewhat more likely than not to avoid raising rates on Tuesday. The central bank in March pushed short-term rates up a quarter of a percentage point, the first increase in two years, as insurance against too rapid economic growth generating faster inflation.

A separate economic report Wednesday indicated that the economy had begun to slow from its strong pace earlier in the year, bolstering the case for the Fed to leave interest rates unchanged.

The Commerce Department reported that business sales slumped three-tenths of 1 percent in March, while inventories rose three-tenths of 1 percent. The drop in business sales, the first this year, could portend a significant slowdown in the economy if shelves begin to bulge and cause store managers to reduce orders.