Sharply lower prices for oil, food and some other finished goods pushed down the producer price index for January by 0.7 percent, the largest monthly decline in more than three years, the Labor Department reported yesterday.
The index had climbed sharply in the last three months of 1985, but declines were widespread among products last month. Gasoline prices fell 5.7 percent, which was not as much as they had gone up during the two previous months. Home heating oil prices tumbled 10.8 percent, which was slightly more than they had risen in November and December. Consumer food prices also went down 0.4 percent after rising about 3.5 percent over the previous three months. That decline would have been greater except for a 17.4 percent increase in roasted coffee prices, the department said.
Separate indexes for crude and intermediate goods prices other than for food and energy -- many of which are highly sensitive to changes in economic activity -- either fell or were unchanged. That fact also surprised some analysts who believe that a substantial increase in economic activity is occurring.
The strength of the pickup also was called somewhat into doubt by a report from the Federal Reserve Board that industrial production rose a modest 0.3 percent last month, which was considerably less than the 0.8 percent rise in November and the 0.7 percent rise in December. The relatively small increase in the industrial production index, which measures output of the nation's factories, mines and utilities, was only about half as much as predicted by some analysts on the basis of large increases in employment last month reported earlier by the Labor Department.
The good report on inflation and the modest rise in industrial production were regarded as good news by financial market participants, and boosted bond prices.
"We've had this tremendous producer price index number and an industrial production number that is not too strong," said an economist at a major government securities dealer in New York. "Now the government's long term bond rate is at 9 percent."
"We can expected to see continued moderate growth and even lower inflation," said economist David Wyss of Data Resources Inc., a private forecasting firm.
Alan Greenspan of Townsend-Greenspan & Co. said that he still expects the gross national product, adjusted for inflation, to rise at about a 4 percent annual rate this quarter. But he cautioned: "The employment figures are giving an indication of much stronger growth than is the case. There probably will be some adjustments in the figures for February and March."
The Labor Department report released last week showed civilian payrolls going up by about 565,000 jobs in January.
Greenspan also said that he expects the Commerce Department to cut "in half" its preliminary estimate that real GNP rose at a 2.4 percent rate in the fourth quarter. He said that figures for consumer spending and business additions to inventories will be lowered and that the estimate for the trade deficit, which is a negative factor, will be increased next week when Commerce releases its first scheduled revision of the fourth-quarter numbers.
"The tone of the economy is still improving, but it's modest," Greenspan said. To keep the improvement going will take a large increase in new orders from manufacturers whose order backlogs are low relative to their shipments, he said.
One reason such an increase in orders may occur is that business inventories are at relatively low levels. A separate report released yesterday by the Commerce Department said that manufacturing and trade inventories were virtually unchanged in December and that the ratio of inventories to sales fell to 1.33, a drop of 0.02 from November.
The Federal Reserve report said that production at factories rose 0.4 percent last month, primarily as a result of a big 2.2 percent increase in the output of durable goods for consumer markets. That increase, in turn, was largely the result of a rise in automobile assemblies from an annual rate of 8.1 million units in December to 8.4 million in January.
Production of intermediate materials rose 0.5 percent, with construction supplies showing a gain of 0.9 percent. Part of the January employment gains have been attributed to unusually open weather that swelled construction activity (on a seasonally adjusted basis).
The output of business equipment rose 0.6 percent, twice as much as in December. Production of defense and space equipment fell 0.2 percent. This is an unusual decline for a category of products that is up 9.1 percent in the past 12 months, which is the largest for any category.
The January drop in producer prices left the finished-goods index 1.4 percent higher than a year earlier. Most analysts expect a bigger drop in the index for February when more of the big declines in crude-oil prices have had time to work their way through the economy.