Producer prices recorded their biggest decline in more than five years in January on plunging energy costs, pointing to benign inflation in the near term that could turn into very damaging inflation and provide an argument against raising interest rates.
The Department of Labor said its Producer Price Index for final demand fell 0.8%, the biggest drop since the revamped series started in November 2009. It was the third straight month of decline in the index.
What is the PPI?
The Producer Price Index shows trends within the wholesale markets, manufacturing industries and commodities markets. These are all of the physical goods-producing industries that make up the US economy.
The January PPI showed broad weakness in prices for everything from medical services to food. The producer-price index for final demand, which measures prices that businesses receive for their goods and services. The index was flat from a year earlier, slipping from 1.1% annual growth in December.
US ports and refineries are running out of space for stockpiled oil and refined gasoline. The US oil glut is now near an 80-year high. Annual measures of consumer-price inflation could turn negative in the coming months if prices remain weak.
More Data Points to Inflation
The Conference Board, a private research group, also said its index of consumer confidence dropped to 96.4 this month from a revised 103.8 in January. The PPI’s related index, the Consumer Price Index (for all urban consumers) dropped 0.7% in January.
Inflation is now starting to affect construction markets. According to Engineering News-Record, total construction costs for the 12 months ending in February were up 2.9%.