Prices paid to US producers for consumer goods fell sharply in January even as the overall producer price index posted its largest gain in four months, revealing a stark divergence that undermines claims that tariffs are squeezing American households.
Finished consumer goods declined 1.3 percent from December, the steepest drop since March 2025, according to Bureau of Labor Statistics data released Friday. The decrease was driven by broad-based weakness across durables and nondurables, with prices for passenger cars, trucks, furniture, appliances and apparel all flat or falling.
The consumer goods deflation came even as the headline PPI increased 0.5 percent in the month, exceeding the 0.3 percent median estimate in a Bloomberg survey of economists. The divergence highlights how the overall index masks sharply different pricing dynamics across the economy.
Energy and Food Lead Decline
Gasoline prices fell 5.5 percent in January, accounting for roughly 80 percent of the decline in finished energy goods, which dropped 2.7 percent for the month. Chicken egg prices collapsed 63.9 percent from December as bird flu-related supply disruptions from late 2025 unwound, dragging finished consumer foods down 1.5 percent for the month. For the year, finished consumer foods are down 1.7 percent.
Even excluding the volatile food and energy categories, finished consumer goods rose just 0.2 percent from December, with personal consumption goods excluding energy down 0.5 percent for the month and personal consumption goods excluding foods down 1.2 percent. The declines suggest retailers maintain limited pricing power and are absorbing rather than passing through cost pressures.
The consumer goods data undermine claims that tariffs are squeezing American households at the producer level. Durable goods prices were essentially unchanged from December, with passenger cars flat at zero percent, light motor trucks up just 0.1 percent, household furniture down 0.1 percent, household appliances up 0.2 percent, and home electronics unchanged. Both men’s and boys’ apparel and women’s, girls’, and infants’ apparel registered zero percent price changes for the month.
The producer price index measures prices paid to U.S. producers of goods and services. It is not a measure of wholesale prices, although it is often referred to as a wholesale price index. The headline numbers come from the index for final demand, which is based on prices of goods sold to households for personal consumption, foreign consumers, governments, and businesses as capital investments.
AI Infrastructure Drives Capital Equipment Surge
The strength in core goods inflation, up 0.7 percent from December excluding food and energy, wasn’t broad-based tariff pressure but rather concentrated in categories linked to artificial intelligence infrastructure and defense spending.
Communication and related equipment prices jumped 8.6 percent in January and are up 13.5 percent from a year earlier, the sharpest increases on record for the category. The surge reflects intense competition among tech giants for constrained data center equipment as Microsoft, Meta, Alphabet, and Amazon race to build AI computing capacity.
Related categories also posted strong gains, with electronic computers and equipment up 1.0 percent in January and 5.8 percent year-over-year, electronic components advancing 0.7 percent for the month and 6.5 percent annually, and switchgear and industrial controls rising 1.3 percent monthly and 12.2 percent from a year ago. The switchgear category captures power distribution and cooling infrastructure essential for data centers.
Defense-related equipment also showed sharp increases, with search, detection, navigation and guidance systems surging 15.5 percent in the month. Internal combustion engines climbed 3.8 percent in January while metal cutting machine tools jumped 5.6 percent, likely reflecting defense procurement and industrial capacity constraints rather than consumer-facing tariff pass-through.
Private capital equipment for manufacturing industries rose 5.4 percent from a year earlier, outpacing the 3.7 percent gain for non-manufacturing. The divergence reflects semiconductor fabrication facility construction, chip equipment manufacturing, and data center buildout classified under manufacturing investment.
Government Paying Sharply Higher Prices
A striking divergence emerged between private sector and government purchasing patterns. Government-purchased goods excluding food and energy rose 1.9 percent in January, even as private finished consumer goods fell 1.3 percent from December, a 3.2 percentage point spread that highlights how different buyers are experiencing radically different price pressures.
Government purchased capital equipment jumped 2.6 percent from December and is up 5.5 percent year-over-year. Defense purchases increased 1.4 percent in the month while non-defense purchases rose 0.6 percent. Total government purchases advanced 0.9 percent after being flat in December.
Margin Expansion Dominates Services Inflation
Final demand services advanced 0.8 percent in January, the largest increase since July 2025, but the composition reveals margin expansion rather than rising input costs. Trade services, which measure margins received by wholesalers and retailers, spiked 2.5 percent for the month, accounting for most of the services increase and representing the largest pickup in margins in data extending back to 2009.
More than 20 percent of the January services gain came from a single category: professional and commercial equipment wholesaling margins, which jumped 14.4 percent in the month. This is likely related to AI-related spending. Apparel, footwear, and accessories retailing margins surged 8.8 percent, suggesting a healthy consumer appetite. Chemicals wholesaling margins climbed 8.4 percent. Health, beauty, and optical goods retailing advanced 3.2 percent, also suggesting robust consumer demand.
The concentration of increases in margin categories rather than in cost-based services suggests opportunistic pricing and rising demand rather than broad cost pressures.
Staffing services rose 2.2 percent in January, legal services increased 1.8 percent, and commercial machinery repair climbed 2.2 percent, all more modest gains reflecting actual input costs. Traveler accommodation services fell 4.1 percent, indicating pricing discipline remains in consumer-facing services.
The trade margins data captures the gap between what wholesalers and retailers pay for goods and what they charge. The sharp increases occurred even as their input costs fell, with finished consumer goods down 1.3 percent from December providing clear evidence that margin expansion rather than cost pass-through is driving the services inflation.
The Fed Likely To Stay on Hold
A less-volatile PPI measure that excludes food, energy and trade services increased 0.3 percent for a third straight month, matching economist expectations and suggesting underlying inflation remains contained. The measure is up 3.4 percent from a year earlier, showing persistent but moderate inflation in core producer costs.
The divergence between falling consumer goods prices and rising wholesaler margins complicates the inflation narrative. Some economists bumped up their estimates of January’s core personal consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, to 0.5 percent for the month following the PPI data, which would be among the strongest monthly readings in recent years. However, the consumer goods deflation suggests limited pass-through to retail prices may prevent the full translation of margin expansion into the Fed’s preferred inflation gauge.
Federal Reserve officials are likely to examine the details carefully rather than react to the headline number. Consumer goods deflation suggests monetary policy is restrictive for the consumer sector, while concentrated inflation in AI infrastructure represents productive investment and capacity constraints rather than monetary phenomena requiring policy response. The margin expansion in distribution channels may prove transitory if it reflects one-time pricing adjustments rather than sustained cost pressures. The combined effect is likely enough to keep the Fed hold in the coming months, which is what markets had already priced in.
Intermediate demand figures showed continued disinflation in the production pipeline. Processed goods for intermediate demand were unchanged for a second consecutive month, while unprocessed goods fell 0.5 percent in January as foodstuffs and feedstuffs dropped 3.5 percent and raw milk declined 9.8 percent. Excluding food and energy, however, processed goods for intermediate demand rose 0.5 percent for the month, suggesting some cost pressures earlier in the supply chain.
