PPI Spike - Cause for Alarm?

Today it was reported that the Producer Pricing Index (PPI) increased 0.8% in November. This is the strongest increase since March and was well above consensus. Federal Reserve officials were quick to discount this spike as a one off and no cause for alarm. It is the opinion of this blog that this is the first sign of inflation (see blog Inflation Is Coming 10/14/10).

Now while one data point does not make a trend the signs for inflation are starting to feed into the numbers. Digging deeper into the numbers reveals the cause of the spike was energy and food. Readers of this blog should not be surprised as most commodity prices have been trending higher for months. Oil is over $90 per barrel, copper is up 31% since August, wheat, corn and soybeans are near highs, cotton is limit up today and almost at multi-year highs, sugar and cocoa are near to multi-year highs, so what exactly is surprising?

To me the most fascinating part of it all is that our so called "leaders" at the Federal Reserve continue to bury their heads in the sand and claim that they have everything under control. Australia, China, Brazil and other emerging markets are all trying to tame inflation while we continue to aimlessly print money. Now is this printing working?

One of the main uses of the money is to keep US interest rates low by buying US treasury debt. Looking at the 30-year Treasury Bond and the 10-year Treasury Note shows a completely different picture. The yields on these and other bonds around the globe are rising rapidly even with the Federal Reserve trying to keep them low. The market is essentially snubbing its nose at Bernanke and his team and is pointing to a rapid rise in inflation.

It is my contention that in the near term inflation will start to surge forcing the Federal Reserve's arm to look into raising rates. This could take effect by the middle of 2011 and would cause the market to sell off sharply. While I am no soothsayer, the signs are there, the bubbles are being created and a misstep at this stage of the recovery would put the economy into a tailspin.