Consumer prices fell in May, the first decline in 10 months, as energy costs eased from highs hit in early April, the government reported yesterday.

The figures suggest that after a year of Federal Reserve interest rate increases, the U.S. economy is in pretty good shape, growing at a decent clip with low inflation, unemployment and interest rates.

But the Fed is far from declaring victory, or finishing its work of raising its benchmark short-term rate -- contrary to the hopes and predictions of many traders and analysts in the financial markets.

Federal Reserve Chairman Alan Greenspan indicated to Congress's Joint Economic Committee last week that the central bank remains concerned about the potential for future inflation. Interest rates remain too low. Labor costs are rising. Businesses are finding it easier to raise prices. And Fed officials are intensely studying whether the red-hot housing market might contribute to higher overall consumer prices.

To keep the lid on inflation, he suggested, the Fed probably will keep steadily raising short-term interest rates in the months to come.

Greenspan declined, as always, to indicate how high the benchmark rate might go before the Fed is through. But some analysts said yesterday that many investors are being over-optimistic in thinking the Fed may stop after raising the rate to 3.5 percent from its current 3 percent level. Instead, they predicted that the rate will be closer to 4 percent by the end of this year and approaching 5 percent by the end of next year.

The Fed might even raise the rate temporarily higher than necessary -- above a "neutral rate" that neither slows nor stimulates the economy -- to make absolutely sure inflationary embers are snuffed out.

The way Fed officials look at it, from a risk management perspective, it's better to overshoot a little when raising rates than to stop short, said William Dudley, chief economist at Goldman Sachs U.S. Economics Research.

"If you don't go far enough, you may have a bad inflation consequence; if you go too far, you can easily reverse," Dudley said, adding that stopping too soon would also damage the Fed's credibility in the markets.

Even so, recent tame inflation figures provide no reason for the Fed to raise rates more aggressively now, in either bigger or more frequent steps, analysts agreed.

The consumer price index, a widely followed inflation gauge, slid 0.1 percent last month after climbing 0.5 percent the month before, the Labor Department said. After excluding energy and food costs, underlying or "core" inflation edged up just 0.1 percent, after being flat in April.

That meant that average wages for most U.S. workers rose faster in May than consumer prices. But because energy prices had jumped so much in previous months, average weekly wages did not keep up with inflation over the year that ended in May.

Average weekly wages for production and non-supervisory workers, who account for about 80 percent of the labor force, rose 0.3 percent from April to May, after adjusting for inflation, the department said in a separate report. But average weekly wages for those workers fell 0.3 percent in the 12 months ended in May.

Energy prices tumbled 2 percent in May after surging 4.5 percent in April. But oil prices have climbed recently, raising the possibility that inflation will pick up again this month.

Transportation costs fell 1 percent last month, reflecting lower fuel costs, the Labor Department said. Many other prices barely budged last month. Food and housing prices rose just 0.1 percent. Clothing prices were flat.

However, inflation pressures continue to build as the economy expands at a reasonably good pace, according to the Fed's recent survey of regional economic conditions, which also was released yesterday. While Fed officials closely follow national economic data, the survey provides details and anecdotes from the 12 regional Fed banks.

The Federal Reserve Bank of San Francisco, for example, said consumer prices rose in its district from mid-April through May as businesses passed on earlier hikes in energy costs.

The Cleveland Fed said businesses in its district were passing on raw materials costs to customers. Prices rose for many construction materials, such as lumber, cement, brick, tile and glass, in many of the 12 Fed districts, according to the survey, called the Beige Book. Several banks noted increases in transportation and health care costs.

Meanwhile, businesses in several districts complained about the difficulty of finding specific types of workers -- a sign of increasing tightness in the labor market and a potential source of inflationary pressures.

Greenspan's remarks to Congress last week strengthened expectations that Fed officials will lift the federal funds rate, the overnight interest rate charged between banks on overnight loans, to 3.25 percent from 3 percent at their meeting later this month. That would be the ninth quarter-percentage point increase in a year.

Before Greenspan spoke, many analysts had predicted that cooling economic growth and tame inflation would prompt the Fed to raise the rate no higher than 3.5 percent this year -- an expectation reflected as well in the pricing of futures contracts linked to the funds rate. One Fed official helped fuel such speculation by suggesting in an interview that the Fed might stop at 3.25 percent.

But Greenspan downplayed concerns about slowing growth, highlighted inflation risks and gave no sense that the Fed was planning to pause soon its series of rate increases. Even so, futures contracts tied to the federal funds rate were priced yesterday to reflect traders' expectations that the rate will probably be no higher than 3.75 percent by year-end.

Several Fed officials and staff economists have estimated a neutral federal funds level to be somewhere between 3.5 percent and 5.5 percent but agree it is a moving target that changes with economic conditions.

Greenspan has declined to put a number on neutral, but says he will know it when he gets there.

The chairman may not have a firm idea of how high the rate will go, but "he thinks we are going higher than the market thinks," Dudley said.

Federal Reserve Chairman Alan Greenspan.