On a day when the investment community received a less-than-flattering report on May retail sales, we also learned that producer (wholesale) prices for the same month were down sharply. Specifically, the Department of Labor reported that the Producer Price Index for finished goods fell 1.0%, the largest decline in nearly three years. The primary catalyst was a nearly 9% drop in gasoline prices.

A closer examination shows that the decrease in finished goods prices was led by the index for finished energy goods, which fell 4.3%. It marked the largest decline for the energy component since a 4.6% decrease in March of 2009. Prices for finished consumer foods fell 0.6%, the biggest decline since a 0.7% decrease last December. Meanwhile, the index for finished goods less these two aforementioned volatile components advanced a rather tame 0.2%. Overall, prices for finished goods advanced 0.7% for the 12 months ended in May, the eighth consecutive month of slowing year-over-year increases following a 7.0% increase for the 12 months ended September, 2011.    

The latest report is both a good and bad snapshot of current economic conditions. On the negative side, the data suggest that economic growth in this country is proceeding at a mundane rate right now, which is not surprising given the recent data on employment, retail sales, and manufacturing and non-manufacturing activity. Conversely, the retreat in prices suggests that inflation is not a big issue for the central bank at this moment and gives it the flexibility to take monetary actions if the economy were to falter in the months ahead.

Indeed, the mild inflationary environment, allows the Federal Reserve to keep interest rates at record lows. It also gives the lead bank the ability to implement further economic stimulus. If the economy continues on its lackluster pace of growth and the conditions overseas don’t improve—several euro zone nations are in recessions—the calls for the Federal Reserve to enact another round of bond-buying will probably intensify. Just yesterday, Federal Reserve Bank of Chicago President Charles Evans said he supports additional monetary measures (i.e., QE3) designed to produce faster jobs growth.

The latest wholesale pricing data are sure to be closely monitored by the Federal Reserve ahead of its two-day monetary policy meeting, which kicks off next Tuesday. Investors should note that data on May consumer prices are due tomorrow.