Probably the most interesting economic report of those released last week was the January report on the Producer Price Index from the Bureau of Labor Statistics, which showed the headline producer price index for final demand had fallen by a seasonally adjusted 0.8% for the month, after falling 0.2% in both November and December, and which left year over year wholesale inflation unchanged.  Both the monthly decrease and the year over year change were the greatest drop that this new PPI index has ever shown in the two years of its reformulated data, while wholesale prices for goods saw their largest drop in more than five years when compared to the old PPI.

Every subindex of the PPI except for final demand for trade services was lower in January, as the price index for final demand for goods fell by 2.1%, led by a 10.3% decrease in prices for wholesale energy products, with a 1.2% increase in wholesale electricity prices offsetting a 24.0% decrease in wholesale gasoline prices and decreases of 19.6% and 19.2% for home heating oil and diesel fuel respectively.   The index for final demand for foods was also down 1.1%, the largest drop in finished food prices since March, as fresh eggs fell 21.7% and pork prices were 7.6% lower, while seafood prices rose 10.1% and vegetable prices rose 8.1%.  Excluding food and energy, even core wholesale prices, as measured by the index for final demand for goods less foods and energy, fell 0.2%, with drops of 9.1% in wholesale prices for industrial chemicals and 1.1% for transformers and power regulators leading core prices lower.

In addition, the index for final demand for services fell by 0.2%, as the index for final demand for transportation and warehousing services fell 0.8%, as passenger airline margins fell 1.0% and margins for both railroads and freight truckers fell 0.7%.  Meanwhile, the index for  final demand for trade services, a measure of the margins received by retailers and wholesalers, rose by 0.5% as a 9.3% increase in the margins received by flooring and floor coverings retailers and generally higher margins for other retailers and wholesalers offset a 31.1% decrease in margins received by TV, video, and photographic equipment retailers.   Finally, the index for final demand for services less trade, transportation, and warehousing services fell 0.4% on a 4.5% decrease in prices for securities brokerage, dealing, investment advice, and related services, a 3.8% decrease in flight arrangement services, and a 1.3% decrease in producer prices for outpatient care, which were partially offset by a 5.0% increase in passenger car rental margins.

This report also showed the price index for processed goods for intermediate demand fell by 2.8% in January, the largest drop since a 4.1% drop in December 2008, leaving intermediate goods 5.5% lower priced than a year ago.  More than half of that drop could be accounted for by an 8.3% drop in prices for intermediate energy goods, again led by a 24.0% decrease in intermediate gasoline prices.  But the index for processed foods and feeds also dropped by 2.5%, as intermediate dairy products were priced 5.7% lower and prepared animal feeds fell 3.6%.  And even core intermediate goods were lower, as the price index for processed goods for intermediate demand less food and energy fell 1.3% after falling 0.6% in December and 0.5% in November, with organic chemicals down 11.5%, agricultural chemicals down 6.4%, and plastic resins down 4.7%.

In addition, the price index for intermediate unprocessed goods fell by 9.4% after falling 6.4% in December and is now 18.4% below the level of a year ago, on a 23.6% drop in the index for raw energy materials led by a 30.6% decrease in crude oil prices and a 1.8% drop in producer prices for unprocessed foods and feeds, which came largely on an 18.7% drop in prices for slaughter hogs, while even the core index for raw materials fell 0.7% on a 3.5% drop in scrap copper prices and a 3.1% drop in scrap paper prices.

Finally, the price index for services for intermediate demand fell 0.2% in January, as a 0.3% decrease in the index for  transportation and warehousing services for intermediate demand was offset by a 0.4% decrease in prices for intermediate services less trade, transportation, and warehousing, while prices for trade services for intermediate demand were unchanged.  Over the 12 months ended in January, the price index for services for intermediate demand rose 1.5%.

The implication of widespread lower prices such as this report reveals is that yet to be released January reports that are reported in dollars are likely to show lower sales, orders, and inventories.  Hence, we should not be surprised if we see that the coming releases for such reports as January wholesale sales and inventories, January business inventories, January factory orders, and even the January advance report on durable goods come in nominally lower than December.  The key to reading those reports will be to examine which of the components are down and by how much, to reveal whether the declines are actual declines in goods ordered, sold, manufactured or inventoried, or whether the reports are actually showing an increase which just seems like a decrease because of lower prices..

(crossposted from MarketWatch 666)