Prices for retail and wholesale goods have declined since last January.  Two reports from the Bureau of Labor Statistics showed that while consumer and producer prices increased slightly from December to January, they remained below their January 2008 levels, due to price declines during the latter half of 2008.  (See Chart) The headline Producer Price Index, which measures the prices paid by wholesalers for all finished goods, rose 0.8 percent in January due in large part to a 3.7 percent jump in energy prices.  Setting aside typically volatile energy and food price changes, the “core” index of wholesale prices rose 0.4 percent.  Similarly, the Consumer Price Index inched up 0.3 percent, driven by a substantial 1.7 percent increase in consumer energy prices.  The core-CPI increased a slightly smaller 0.2 percent month-to-month, though some component of this inflation was likely caused by year-beginning increases in state excise taxes.  Nevertheless, both consumer and producer price indices registered year-over-year negative growth, something which has not occurred since the mid-1950s.

Federal Reserve defines long-run inflation projections.  For the first time the Federal Open Market Committee has released a longer-term economic forecast that projects beyond the 3-year time horizon used in its quarterly Summary of Economic Projections.  This forecast – which covers real Gross Domestic Product growth, the civilian unemployment rate, and consumer price inflation– “represent[s] each participant's assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and absent further shocks to the economy.”  These numerical estimates of long-term equilibrium values have been interpreted as growth and inflation targets.  Given current concern about price deflation, the announcement of an inflation target is especially significant.  It may serve to anchor expectations about Fed policy reaction should price deflation develop.

Industrial production down 10 percent from one year ago.  The Federal Reserve’s measure of Industrial Production fell 1.8 percent in January and is now 10.0 percent below its January 2008 level.  Extended plant shutdowns at motor vehicle and parts manufacturers were a prime contributor to the slowdown, with production activity declining 23.3 percent from December to January.  The durable goods industry as a whole has slowed considerably in the past six months. Comparing it to last year’s January reading, activity in the durable goods manufacturing sector fell 17.5 percent, the largest such year-over-year decline since the Fed began tracking this statistic in 1973.  Capacity utilization for all industrial sectors continued to slide in January; the reading was down to 72.0 percent from a recent peak of 81.4 percent in July 2007.  In addition to persisting troubles facing the auto industry, industrial production has been hobbled by major slack in demand for U.S. exports, which had previously been a bright spot when once-resilient international trading partners were able to take advantage of a cheaper U.S. dollar.