NEW YORK (CNN/Money) - U.S. wholesale prices fell in November, the government said Friday, a surprise to Wall Street observers expecting a slight gain.

While offering evidence that higher inflation is not yet just around the corner, the report did little to assuage critics worried that the Federal Reserve, in no hurry to raise its key interest rate from a 41-year low, is playing a dangerous game of chicken with inflation.

The Labor Department said its producer price index (PPI), a measure of wholesale prices, fell 0.3 percent following a 0.8 percent gain in October. The so-called core PPI, which excludes often volatile food and energy prices, fell 0.1 percent after rising 0.5 percent in October.

Economists, on average, expected PPI to rise 0.1 percent and core PPI to be flat, according to Briefing.com. It was the first decline in PPI since May and in the core PPI since June.

"This basically shows that inflation is not really an issue," Edgar Peters, chief investment officer at Panagora Asset Management in Boston, told Reuters.

Energy prices dropped 1.2 percent, compared with October's 0.1 percent drop. Gasoline prices fell 4.8 percent, natural gas prices fell 1.1 percent, and heating oil prices fell 1.6 percent. Food prices fell 0.3 percent.

Car prices fell 0.8 percent, compared with October's 1.6 percent gain.

The report helped U.S. stock prices rise in early trading, but those gains were erased by a report that the University of Michigan's closely watched consumer sentiment index posted a surprising decline in December. Treasury bond prices rose, reversing earlier losses and keeping yields -- which move up as prices fall -- relatively low.

In fact, despite steady economic growth since the end of 2001, when the latest recession ended, and despite a blistering rate of growth in the third quarter, inflation has stayed low, according to many measures, enabling the Fed to keep interest rates low. On Tuesday, it left its key overnight lending rate at the lowest level since 1962 and promised to stay on hold for some time to come.

Low inflation is good news for consumers, but not always good news for companies, some of which are struggling to maintain pricing power even as they see wholesale prices rise -- the Labor Department's core consumer price index (CPI) has risen just 1.3 percent in the past 12 months, near its lowest level in 38 years, while the PPI has risen 3.4 percent.

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Some goods producers, in fact, have seen outright deflation, or falling prices, for some consumer goods, hurting profit margins and drawing nervous comparisons between the United States and Japan, the world's second-largest economy, which has suffered from deflation for much of the past decade.

But some bond market observers doubted Friday's report was a sign that deflation was about to rear its ugly head, noting signs of inflation in the pipeline.

The Labor Department divides its report into three stages -- crude goods, intermediate goods and finished goods. In the process of making a cotton shirt, the raw cotton is the crude good, cotton yarn is the intermediate good and the shirt is the finished good.

Though core finished-goods prices have risen a paltry 0.5-percent in the past year, prices for core intermediate goods have risen 1.8 percent and core crude prices have risen a whopping 17.1 percent. Inflation is in the pipeline, in other words, and some analysts think it will eventually hit consumers.

What's more, the recent fluctuation in the core PPI could be due to dramatic shifts in automobile prices. Averaged out over the past two months, core producer prices have shown a solid gain.

"What you're left with is a figure consistent with the inflation rate slowly moving upward," said Anthony Crescenzi, bond market strategist at Miller Tabak & Co.

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Crescenzi and other bond market analysts have seen signs of rising inflation in commodity prices, a falling dollar and other signposts, and some warn that the Fed, by waiting too long to raise rates, could risk allowing too much inflation into the economy, either in consumer prices or in financial assets, as happened in the stock-market bubble of the late 1990s. Neither would be too healthy for the economy.

This week Fed policy makers did shift their stance on inflation, saying the risks of inflation and deflation, or a drop in prices, were balanced. But they promised to keep their target for their key short-term interest rate at the lowest level in 41 years, in the belief that inflation will be slow to gather. That still may not be enough to satisfy some critics.

Lincoln Anderson, chief investment officer at LPL Financial Services in Boston, warned that, if the Fed moved interest rates back up at the same slow, piecemeal pace it moved rates down in 2001 and 2002, inflation could become a major problem in 2005 and 2006.

"It reminds me of PIO, or pilot induced oscillation, a lag in the plane's response to a pilot moving the stick," Anderson said. "You push the stick down and the plane doesn't go down right away, so you push it down more, and then it really starts to fall. The same thing happens in monetary policy if you have gradualism in interest rates."