Economists were shocked once again today. First, Retail Sales "Solidly" Flat, which we just covered.

The Producer Price Index for Final Demand (PPI-FD) was the real shocker.

Instead of rising 0.1% as expected by the Bloomberg Econoday consensus, it fell 0.4%.

Highlights

The burst higher for producer prices proved brief. The PPI-FD for July fell 0.4 percent to pull the year-on-year rate into the negative column at minus 0.2 percent. When excluding food & energy, prices fell 0.3 percent with the year-on-year rate sinking below 1 percent to only 0.7 percent.

Minus signs fill the July tables with a 0.3 percent decline for services a special concern. The decline, in part reflecting weakness in apparel, ends three months of prior gains and hints at easing demand at the base of the economy. And goods are also down, 0.4 percent lower for the first decline since February. Wholesale prices of food, pulled down by lower corn prices, fell in the month as did prices for energy and construction as well as both cars and light trucks. Rounding out the bad news is a 0.5 percent monthly decline in finished goods prices.

This report will lower estimates for Tuesday's consumer prices, a report that never has shown much effect from the three or so brief months of price pressure at the wholesale level. This report will not fire up the hawks and, like the weak retail sales report also released this morning, does not point to a September FOMC rate hike.

Recent History

Producer prices have shown unexpected strength the last two reports driven mostly by energy but also by services. Forecasters see the July's headline, held down by energy, rising only 0.1 percent but at a more constructive 0.2 percent when excluding food & energy. Continued strength in this report would point to eventual pass through to consumer prices where pressures have so far been hard to find.

PPI Final Demand

PPI Details

For additional details, let's investigate the BLS Producer Price Index Report.

The Producer Price Index for final demand decreased 0.4 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. In July, the decline in the final demand index was led by prices for final demand services, which fell 0.3 percent. The index for final demand goods decreased 0.4 percent.

Final Demand Services

• The index for final demand services fell 0.3 percent in July, the largest decline since moving down 0.3 percent in March. The July decrease can be traced to margins for final demand trade services, which fell 1.3 percent.
• Nearly 60 percent of the decrease in prices for final demand services is attributable to margins for apparel, jewelry, footwear, and accessories retailing, which fell 6.0 percent.
• The indexes for machinery and equipment wholesaling; health, beauty, and optical goods retailing; food retailing; loan services (partial); and automotive fuels and lubricants retailing also declined.
• Prices for traveler accommodation services climbed 3.9 percent.
• The indexes for chemicals and allied products wholesaling and for securities brokerage, dealing, investment advice, and related services also moved higher.

Final Demand Goods

• The index for final demand goods declined 0.4 percent in July following three straight increases. Almost half of the decrease can be traced to prices for final demand foods, which fell 1.1 percent.
• A major factor in the decrease in the index for final demand goods was prices for beef and veal, which fell 9.8 percent.
• Prices for gasoline, corn, motor vehicles, oilseeds, and iron and steel scrap also moved lower.
• The index for utility natural gas advanced 4.3 percent.
• Prices for eggs for fresh use and nonferrous scrap also increased.

Final Demand Since July 2015

The Fed is not pleased to discover low or negative price pressures on the producer side.

Worse yet (for the Fed, excellent news for consumers), PPI final demand pressures for apparel, jewelry, footwear, and accessories retailing, fell a whopping 6.0 percent.