Tuesday, February 26, 2008


WASHINGTON (MarketWatch) -- Producer prices soared in January, pushed higher by energy prices and the biggest increase in food prices in more than three years, government data showed Tuesday.
The producer price index climbed by 1% last month, the Labor Department reported. The closely followed PPI, which measures the rate of inflation at the wholesale level, had fallen 0.3% in December after having registered a jump of 2.6% in November.
January's core PPI, which excludes food and energy prices, rose 0.4%, driven by higher drug and car prices.
Year over year, the PPI is up 7.4% -- the fastest pace since 1981. Also on an annualized basis, the core PPI is up 2.3%.

Some will say that PPI rises don't necessarily get translated to rises in the CPI, but that is a position that is becoming harder to defend. What will the Fed do if faced with a slowing economy and inflation? I don't know yet, but my guess is that they will keep inflating. What choice do they have?

If the Fed raises rates to fight inflation, they will be faced with a severe recession. That may be what the US economy really needs but the Fed has shown no desire to take that path since Volcker did it in the early 80s. It will take more than this to push them in that direction.

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