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The producer price index (PPI) posted the biggest drop in 5 years according to the latest report from the Labor Department. PPI dropped 0.6%, the most since January 2015, following strong growth of 0.5% in January 2020. The report follows news of an unexpected increase in consumer prices last month.

Key Takeaways

• PPI was dragged down by falling gasoline prices and lower costs of services last month.
• PPI fell 0.6% vs. the 0.1% decline expected, and annual PPI growth was 1.3% vs. 2.1% the month before.
• The coronavirus outbreak has led to reduced demand for travelling due to quarantine restrictions, negatively impacting the cost of gasoline and reducing demand for certain services.

US producer prices fell far more than expected last month. Wholesale energy prices fell 3.6% vs. just 0.7% decline the month before. Energy prices were pulled down by a 6.5% drop in the price of gasoline compared to 1.5% in January. Goods fell 0.9%, with one-third of the decline due to the 6.5% drop in gasoline costs. The drop in goods was the most since September 2015. Wholesale food prices fell 1.6% last month and rose 0.2% the month before. Core goods dropped 0.1% and rose 0.3% in January.

First Cut: February producer prices blunted by declines in food, energy, and trade services. https://t.co/rV0QS6GN6J pic.twitter.com/FTSaJc21gF

— Whetstone Analysis LLC (@AnalysisLlc) March 12, 2020

Services fell a more modest 0.3% following a 0.7% rebound in January, which saw the strongest growth since October 2018. Due to the coronavirus outbreak, airline tickets and hotel accommodation have dropped, with the latter falling the most since April 2009. This decline was offset by healthcare service costs, which rose 0.2% last month, adding to a 0.6% increase the month before. Portfolio management fees rose 0.3% last month and 2.3% the month before, although this component may be in danger from the ongoing selloff in the stock markets.

Excluding the volatile components of food, energy, and trade services, PPI dropped 0.1%, the first decrease of this core PPI metric since June. Core PPI rose 0.4% in January. In the 12 months through February, core PPI rose 1.4% vs. 1.5% the month before. This gap between annual PPI in January and February much greater with 2.1% growth in January and just 1.3% growth last month. Economists had expected 1.8% growth in the 12 months through February.

Economic Impact of the Coronavirus

The report follows news on Wednesday revealing an unexpected increase in consumer prices, partially attributable to panic buying as people stock up to prepare for potential quarantine. Inflation is in check, however, as the increased costs of certain consumer goods are offset by declining demand for services related to traveling, entertainment, transport, and recreation.

Stocks have entered a bear market due to concerns around the outbreak, amplified by yesterday’s announcement from the WHO declaring the virus to be a global pandemic. The threat of a global recession is rising, with crude oil prices falling rapidly due to reduced demand for travel and an ensuing price war between Russia and Saudi Arabia.

Market Reaction

Gold prices have seen strong downward momentum today. Spot gold last traded at $1,587.85/oz, down -3.26% with a high of $1,648.70/oz and a low of $1,587.85/oz. The ECB announced plans to keep interest rates on hold for the time being, breaking away from other central banks in the US, England, and Canada which have implemented emergency rate cuts.