PPI Stokes Inflation Fears

Before the Producer Price Index (PPI) report was released before the bell today, analysts had been looking for a slight increase in prices -- but by and large were attributing them to higher food and energy costs. However, with the January PPI posting the highest core production price levels in over 2 years -- up 0.5% not counting food and energy -- suddenly fears about inflation are back in play.

Inflation is something the Federal Reserve has done little or nothing to address in the aftermath of the Great Recession. Indeed, Quantitative Easing (QE2) measures enacted in the latter part of 2010 clearly indicated that it was deflation, not inflation, that was of higher concern to the Fed. It remains to be seen when the minutes from the last Fed meeting are released today whether inflation was discussed in any meaningful way.

It probably will be going forward, however. Even if Bernanke & Co. believe inflation concerns are currently an overreaction -- they may cite pharmaceutical preparations accounting for 40% of the core PPI reading, which might undermine the narrative that it is "across the board inflation" we are now dealing with -- there is a higher probability that a lengthier inflation discussion may deserve a place at the table next time around.

Analysts are now looking toward tomorrow's Consumer Price Index (CPI) release to see if companies are indeed passing off higher commodity prices to their consumers, again sounding the bell that inflation may be headed to town. The core CPI reading is expected to be up 0.1% in January, and overall up 0.3%. This will follow December's increase of 0.5%.