WASHINGTON -- A big drop in gas prices pushed consumer costs down for a second straight month, and factories staged a modest rebound -- signs the Federal Reserve is managing to stem inflation without pushing the country into recession.

Consumer prices dropped by a bigger-than-expected 0.5 percent last month, matching the September decline, the Labor Department reported Thursday. It marked the first back-to-back decreases in consumer inflation since November and December of last year.

In a second report, the Federal Reserve said that industrial output staged a slight increase of 0.2 percent in October despite a second month of production cutbacks at auto factories and weakness in various industries that supply homebuilding.

The reports were seen as evidence that inflation pressures, which had been rising due to the spike in energy prices, were beginning to recede in response to an economy that is slowing.

"The economy is performing right on cue. Inflation is moderating, growth has slowed but the expansion remains firmly in place," said Mark Zandi, chief economist at Economy.com. "I think the Federal Reserve couldn't be happier."

The 0.5 percent fall in consumer prices last month was better than the 0.3 percent decrease many analysts had expected. Also, core inflation, which excludes volatile energy and food prices, was well-behaved, rising by just 0.1 percent, the smallest gain in eight months.

The Fed is hoping that 17 consecutive interest rate increases will produce a soft landing for the economy in which business growth slows enough to reduce inflation pressures without threatening a recession.

Fed officials hold their last meeting of the year on Dec. 12. Private economists said this week's benign inflation readings should allow the central bank to keep rates unchanged for a third straight meeting.

In addition to the drop in con¿sumer prices, wholesale prices plunged by a record 1.6 percent in October.

Many economists said they believe the Fed is finished raising interest rates and they predicted the next move would be a rate cut, probably by the middle of next year.

While investors had hoped that the economic slowdown, featuring a severe crunch in housing, might prompt the Fed to move more quickly to cut rates, analysts noted that core inflation, while coming down, is still well above the Fed's comfort zone.

Over the past 12 months ending in October, core prices have risen by 2.7 percent, down from a year-over-year reading of 2.9 percent in September. That is still above the Fed's comfort level of 1 percent to 2 percent.

"There is no chance that the Fed will cut rates quickly," said David Wyss, chief economist at Standard & Poor's in New York.

Investors still were cheered by Thursday's news on inflation. The Dow Jones industrial average rose by 54.11 points to 12,305.82, its third straight record close.

Wyss said the overall economy, which slowed sharply in the spring and fall, is probably growing at an annual rate of around 2.3 percent in the current quarter. That would be an improvement from the 1.6 percent growth rate turned in during the July-September period, the slowest pace in three years.

The government also reported Thursday that the slowdown in inflation provided a boost to Americans' weekly incomes, which were up by 3.2 percent in October compared with a year ago, after discounting inflation.

That was the biggest year-over-year gain in more than eight years and followed a period of extremely sluggish wage growth, which Democrats had highlighted in the recent elections as evidence that Republican economic policies were failing the middle class.

Republicans, who lost control of both the House and Senate to the Democrats, had argued that wage growth was poised to pick up with unemployment falling in October to a five-year low of 4.4 percent.

The good October performance on inflation was led by a 7 percent drop in energy prices, which followed a 7.2 percent decline in September. Gasoline prices were down 11.1 percent following an even bigger 13.5 percent drop in September.

In good news for the upcoming winter heating season, home heating oil prices were down 6.1 percent while natural gas prices plunged by 7.7 percent, the largest one-month drop on record.

Since peaking above $3 per gallon in early August, gasoline pump prices have dropped by around 80 cents per gallon nationwide in the past three months.

Food costs edged up 0.3 percent in October as increases in beef, pork and vegetable prices offset declines in poultry and fruit prices.

Other products that showed price declines in October were clothing, new car prices and airline fares.