NEW YORK (CNNMoney.com) -- Prices paid by businesses fell in September on the biggest drop in energy prices in more than 20 years, but a more closely watched inflation reading came in well above Wall Street forecasts Tuesday.

The Producer Price Index, which measures prices on the wholesale level, fell 1.3 percent in September, according to the Labor Department report, compared to the 0.1 percent rise in prices seen in August.

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Economists surveyed by Briefing.com had forecast a 0.7 percent decline.

Energy prices fell 8.4 percent in the month, the biggest decline since July 1986, as gasoline prices fell 22.2 percent, a record percentage decline.

But the so-called core PPI, which strips out often volatile food and energy prices, rose 0.6 percent in September, compared to a 0.4 percent decline in August. Economists had forecast only a 0.2 percent rise in the core PPI.

The core PPI is more closely watched by economists, especially those at the Federal Reserve, as they weigh the inflationary pressures in the economy. With Fed policy-makers meeting Oct. 24 and 25 to determine what interest rate action to take to keep prices stable, the core PPI raised new concerns in the markets.

"The bottom line is core inflation is on the rise and the central bank shouldn't be watching it, it should be acting," said Rich Yamarone, director of economic research at Argus Research, an advocate of a rate hike at the next Fed meeting - even though he said he doesn't expect the Fed to do so.

But Steven Wieting, senior economist at Citigroup (Charts), said he's not overly concerned by the core number, since it showed declines each of the previous two months that may have been overstated.

Wieting said even with the unexpected big jump in the core PPI in September, wholesale prices were below the level seen in June.

"I think the Fed will look at it in the context of the past couple of months," he said.

Yamarone said it would be easier to ignore the PPI report if it was the only one showing increased inflationary pressures, but he said other readings are also a concern.

"There's a lot of noise in this report, and it's the most volatile of all price measures," he conceded. "But the bottom line is that a number of the core inflation measures continue to rise."

The report comes the day before the government's key inflation reading, the Consumer Price Index, which measures inflation at the retail level.

Economists are forecasting a 0.3 percent decline in the overall CPI after a 0.2 percent rise in August. The core CPI is forecast to have risen 0.2 percent, the same gain as posted in August.

"Of course it's the CPI that really matters," said economist Robert Brusca of FAO Economics. "But PPI core inflation tends to be lower than the CPI since the PPI omits services."

Still, the bond market, which fell immediately after the 8:30 a.m. ET report, recovered and was up slightly in mid-morning trading - an indication that traders were not overly alarmed by inflation implications of the report. That trimmed the yield on the 10-year note, which moves in the opposite direction of prices, to 4.74 percent from 4.77 percent before the report and 4.78 percent at the end of trading Monday.

Yamarone said he believes a separate Fed report showing an unexpected drop in industrial production in September calmed inflation concerns, since a slower economy can limit price pressures.

But Yamarone said he believed too many economists are overlooking the boost the economy could get in the fourth quarter from the drop in energy prices putting more money back in the hands of consumers.

Stocks were down in mid-morning trading, though, despite strong earnings reports and a number of high-profile deals that might normally lift equities. Analysts pointed to the economic reports as a reason for the stock sell-off.

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