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The FED is behind the curve and the next few data points on the US economy and employment will drive interest rates higher.  The PPI is yet another data point that confirms our thesis.

Yesterday, the (BLS) reported that the seasonally-adjusted Producer Price Index (PPI) for finished goods rose month-to-month by 0.2% in December, following November’s 1.8% monthly gain.  Importantly year-over-year, December’s annual PPI inflation jumped sharply, again, to 4.4% (versus a 0.9% annual contraction for December 2008), the highest annual inflation rate since October 2008, following November 2009’s 2.4% annual gain. 

Comparing against collapsing oil prices in 4Q08, year-to-year change in PPI inflation has returned to a positive trend and should continue to increase as we move through 1H10.  Annual PPI inflation averaged a 2.5% contraction in 2009 against a 6.3% average gain in 2008. 

On a monthly basis, seasonally-adjusted December intermediate goods rose by 0.5% (up by 1.4% in November), with crude goods up by 1.0% (up by 5.7% in November). Year-to-year inflation was up across-the-board, with December intermediate goods up by 3.0% (down by 1.6% in November) and December crude goods up by 12.3% (up by 4.7% in November).

Howard Penney

Managing Director